Credit Scores Used By Lenders Explained
Credit Scores Used By Lenders When Qualifying For Home Loans
Credit Scores is one of the most important factors when it comes to qualifying for a mortgage loan. Many home buyers and homeowners who are planning on refinancing often get confused on which credit scores used by lenders since there are three different credit reporting agencies, also called credit bureaus. Each consumer who has had credit will have three different credit scores from each one of the major three credit bureaus. The three giant credit reporting agencies are Transunion, Experian, and Equifax. Each one of the three credit bureaus are independent of each other so each consumer will have three different credit scores. It is up to each creditor which credit scores they will be using when evaluating a borrower’s credit profile. For example, a particular auto finance company may use Transunion credit report and credit scores when determining a borrower’s credit risk while another auto finance lender may use Equifax when determining a borrower’s credit risk. Yet another car finance company may be using Experian as the credit bureau when analyzing the credit risk of a auto loan borrower. However, mortgage lenders will pull credit report from all three credit bureaus and use the borrower’s middle credit score. It does not matter which credit bureau it is. We will cover a case scenario on credit scores used by lenders in the following paragraph.
Credit Scores Used By Lenders: Case Scenario
Many home buyers or homeowners thinking of refinancing their current home loans will often hear the term minimum credit score required. I often get many calls from mortgage loan borrowers asking what we mean by minimum credit scores required when qualifying for a mortgage loan. Every loan program will have a minimum credit score requirement. For example, FHA requires a borrower to have a 580 minimum credit score in order for the home buyer to qualify for a 3.5% down payment FHA insured mortgage loan. Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set Conventional Loan Requirements . Fannie Mae and Freddie Mac both require a 620 minimum credit score for a borrower to qualify for a Conventional Loan. Most Jumbo Mortgage Lenders require a 700 FICO credit score for a borrower to qualify for a Jumbo Mortgage. The credit scores mortgage lenders are talking about is the middle of the three credit score from the three giant credit reporting agencies: Transunion, Experian, and Equifax. For example, if a mortgage borrower has a 600 FICO credit score for Transunion, 700 FICO credit score for Equifax, and 800 FICO credit score on Experian, the middle score is the 700 FICO credit score from Equifax. The 700 FICO credit score from Equifax will be the credit score used for this mortgage loan borrower when the mortgage lender is qualifying this mortgage borrower.
Credit Scores Used By Lenders: Co-Borrowers
Mortgage lenders will allow a borrower to have non-occupant co-borrowers to be added on a mortgage loan if the main borrower cannot qualify for a mortgage loan because of not meeting the necessary debt to income ratio requirements. Credit scores used by lenders when there is more than one mortgage loan borrower is that mortgage lenders will use the lower middle credit scores of the borrowers when qualifying the borrowers. If there is one mortgage loan borrower and two non-occupant co-borrowers, the person who has the lowest middle credit score will be the credit score used when qualify the main mortgage loan borrower. Lets take a case scenario:
Borrower Experian Equifax Transunion Middle Credit Score
Main Borrower A 500 600 700 600
Co-Borrower B 550 650 750 650
Co-Borrower C 600 700 800 700
On the above chart where Main Borrower A has two Co-Borrowers B and C, the lowest middle credit score out the all of the borrowers, which is Main Borrower A, will be used as the credit score in the credit qualification credit score. So if the Main Borrower needs to qualify for a Freddie Mac Conventional Loan, they would not qualify because Fannie Mae and Freddie Mac will require a 620 credit score to qualify for a Conventional Loan and the credit scores that will be used will be 600 FICO of the main borrower. If the Main Borrower were to qualify for a FHA Loan, the Main Borrower will qualify for a FHA Loan because the 600 credit score meets the FHA minimum credit score of 580 FICO.