Credit Scores Used By Mortgage Lenders In Qualifying Borrowers
This ARTICLE On Credit Scores Used By Mortgage Lenders In Qualifying Borrowers Was PUBLISHED On August 5th, 2019
When you and your family decide to apply for a mortgage it is important to understand the basic qualifications.
- The three main pillars to qualifying for a mortgage are credit score, debt-to-income ratio, and down payment/ equity position (loan-to-value)
- In this blog, we will detail how your credit score affects mortgage qualifications
In this article, we will cover and discuss Credit Scores Used By Lenders In Qualifying Mortgage Borrowers.
Credit Scores Used By Mortgage Lenders Explained
First, it is important to understand what your credit score means.
- Most adult Americans are familiar with the term FICO, which is an acronym Fair Isaac Corporation, the company who invented the scoring model
- The FICO is a grade based on information combined in your credit reports
- Typically, your credit score can range from 300 all the way up to 850
- And of course, the higher the better
- For many years there have been three major consumer credit bureaus
- They are Equifax, Experian, and TransUnion
- They each have slightly different algorithms that compute your credit score
- This is confusing to most Americans
- It is important to understand there are also different scoring models for different industries
- For example, you may walk into an auto dealership and buy a car
- When they pull your credit, you may be told you are a 780
- At the same time, you may be applying for a mortgage and the loan officer tells you your credit score is a 740
- This is difficult to understand, but each industry uses a different scoring model with different credit scores
For the majority of Americans, buying a house is the most expensive item they will ever purchase. That is why mortgage scoring models are the strictest.
How Does Credit Scores Used By Mortgage Lenders Affect Mortgage Rates
Your credit score will determine which loan products you qualify for.
- There are many different loan programs available such as conventional mortgages, FHA, VA, USDA, and NON-QM mortgage loans
- Each different mortgage product has different credit score qualifications
Below are the minimum qualifying credit scores for each product
- FHA 500 – 579 with 10 % down payment
- 580 = with 3.5% down payment
- VA – no minimum credit score requirement
- Conventional – 620 +
- NON-QM – 500 +
Your credit score does directly affect your mortgage interest rate.
Credit Scores Used By Mortgage Lenders And How It Impact Rates
Once again, the higher the score, the lower the interest rate. There are loan level pricing adjustments (LLPA) for borrowers with lower credit scores:
- The lower the interest rate means a lower monthly payment
- But more importantly, it means the less you pay over the life of the loan
- Credit scores are incredibly important in the mortgage process
- Rates change every 20 points in credit score
- For example, having a 620 credit score or a 639 credit score, your mortgage interest rate will be the same
Every 20 points are the next price break in mortgage rates.
What Is Considered A Good Credit Score?
Below Are The Credit Scores Versus Grade:
- 500-579 = Bad credit
- 580-619 = Poor credit
- 620-679 = Fair credit
- 680-739 = Average credit
- 740 and higher = Great credit
What If Spouse Or Co-Borrower Has Higher Credit Scores
In the eyes of QM MORTGAGE lending (Conventional, FHA, VA, and USDA), the middle credit score is used for mortgage lending.
- One step further the lower middle score between applicants will be used
- Example, if your middle score is 650 and your wife is a 680, the 650 credit score will be used for mortgage qualifications
- It is always the lowest middle score of all applicants
In the example below, the loan would be based off 778, the lower middle scores the two applicants:
NON-QM And Credit Scoring
NON-QM has a slightly different way of viewing credit scores.
- The majority of NON-QM mortgage products use the middle credit score of the primary wage earner
- So, whoever has more income counted towards the loan, their middle credit score will be used
- This can only help your mortgage qualifications
- If the primary wage earner has the lower middle score, you are in the same boat as a QM mortgage
If the primary wage earner has a higher middle score, you then get the advantage of better mortgage pricing.
Why Are My Credit Score Higher When I View It Versus Credit Scores Used By Mortgage Lenders
Over the past few years, we have seen many credit scoring companies emerge such as credit karma.
- These are great tools for credit score tracking
- However, the scoring models are based on consumer data and are not accurate for mortgage lending
- Mortgage credit scoring models are commonly referred to as the 2, 4, 5 scoring model
- The lender is required to pull a tri-merged credit report
- Meaning they pull the report from all three major credit bureaus
- This is due to the fact that not every creditor report to all three bureaus
It is in the lender’s best interest to receive as much Credit Data as possible, a report from all three is the best way to ensure they have information from all creditors.
Mortgage Credit Scoring Models
Below are the mortgage scoring models for all three bureaus, notice the numbers 2, 4, 5:
- Experian – FAIR, ISAAC (VER. 2)
- TransUnion – FICO CLASSIC (04)
- Equifax – FICO CLASSIC V5 FACTA
From reading this article you should be able to see the correlation between credit score and mortgage financing.
- We have seen every credit profile under the sun and are here to give advice on how to get your scores up
- No two mortgage borrowers are identical, and everybody’s credit profile is slightly different
- To keep a high credit score
- it is important to pay your bills on time and keep revolving credit card balances low
- Do all you cannot have collections hit your report
For any general questions regarding credit or mortgage financing, please call Mike Gracz on 630-659-7644 or send an email to firstname.lastname@example.org.