Credit Scores Used By Lenders For Mortgage Qualification

This Article Is About Credit Scores Used By Lenders For Mortgage Qualification 

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
• 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

In this blog, we will cover and discuss Credit Scores Used By Lenders For Mortgage Qualification.

Credit Reporting Agencies Used By Lenders

Each one of the three credit bureaus is 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
• 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 an auto loan borrower
• However, lenders will pull a credit report from all three credit bureaus
• Lenders 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.

Case Scenario On Credit Scores Used By Lenders

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 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, HUD 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 loan
• Borrowers with under 580 down to 500 FICO can qualify for FHA Loans but with 10% down payment

Fannie Mae And Freddie Mac Mortgage Guidelines

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 Lenders require a 700 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  borrower has a 600 credit score for Transunion, 700 FICO for Equifax, and 800 FICO on Experian, the middle score is the 700 FICO from Equifax is used

The 700 FICO from Equifax will be the credit score used for this borrower when the mortgage lender is qualifying this borrower.

Credit Scores Used By Lenders On 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 are 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 qualifying the main mortgage loan borrower. Let’s 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. This 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 an FHA Loan, the Main Borrower will qualify for an FHA Loan because the 600 credit score meets the FHA minimum credit score of 580 FICO.

For more information on this topic and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com.