Your credit score is a three-digit number that indicates your creditworthiness in a nutshell. It's not a complete snapshot of your overall financial picture, but lenders look at it when evaluating you for credit cards, loans and mortgages.
But like all things in the financial world, credit scores are nuanced. There are actually multiple versions of your credit score, and they all mean different things to lenders.
For the majority of general lending decisions, such as personal loans and credit cards, lenders use your FICO Score. Your FICO Score is calculated by the data analytics company Fair IsaacCorporation, and it's based on data from your credit reports.VantageScore, another scoring model, is a well-known alternative.
If you're planning to apply for a mortgage, be aware that the credit score you see on your application might differ slightly from the one you're used to. It might even be different than what comes up when youmonitor your credit, or even when you apply for a car loan.
Banks use a slightly different credit score model when evaluating mortgage applicants. Below, we go over what you need to know about credit scores you're looking to buy a home.
The scoring model used in mortgage applications
While the FICO® 8 model is the most widely usedscoring model for general lending decisions, banks use the following FICO scores when you apply for a mortgage:
- FICO®Score 2 (Experian)
- FICO®Score 5 (Equifax)
- FICO®Score 4 (TransUnion)
As you can see, each of the threemain credit bureaus(Equifax, Experian and TransUnion) use a slightly different version of the industry-specific FICO Score. That's because FICO tweaks and tailors its scoring model to best predict the creditworthiness for different industries and bureaus. You're still evaluated on the same core factors (payment history, credit use, credit mix and age of your accounts), but the categories are weighed a little bit differently.
It makes sense: Borrowing and paying off a mortgage arguably requires a different mindset than keeping track of credit card balances and using a credit card responsibly.
The FICO 8 model is known for being more critical of high balances onrevolving credit lines. Since revolving credit is less of a factor when it comes to mortgages, the FICO 2, 4 and 5 models, which put less emphasis on credit utilization, have proven to be reliable when evaluating good candidates for a mortgage.
Mortgage lenders pull all three reports, but only use this one
According toDarrin Q. English, a senior community development loan officer at Quontic Bank, mortgage lenders pull your FICO score from all three bureaus, but they only use one when making their final decision.
"A bank will use all three bureaus,"tells CNBC Select. "It's called a tri-merge."
If all three of your scores are the same, then their choice is simple. But what if your scores are different?
"We'll use that median score as the qualifying credit score," says English. "Not the highest or lowest."
If two of the three scores are the same, lenders use that one, regardless of whether it's higher or lower than the other one.
And if you are applying for a mortgage with another person, such as your spouse or partner, each applicant's FICO 2, 4 and 5 scores are pulled. The bank identifies the median score for both parties, then uses the lowest of the final two.
How your credit score affects your interest rates
Knowing your credit score is the first step in getting the best rates on your mortgage. While mortgage interest rates are currently at an all-time low, they drop even lower when your credit score is above 760.
According to FICO, the current interest rate for a 30-year fixed mortgage is2.377% APR for a 760+ borrower, and3.966% for a borrower with a score between620 and 639 (which is considered subprime).
This 1.589% savings in APR may seem negligible. But it means saving about $260 per month on your mortgage, or $3,120 per year and roughly $93,600 over the lifetime of the loan.
If you currently have a mortgage and are interested in seeing if you can switch to a better rate, look into the pros and cons of refinancingyour home.
How to monitor your credit reports
Since the mortgage industry looks at all three credit reports and scores, you may want to consider a paid credit monitoring service that pulls more comprehensive data than a free version would.
The best credit monitoring services offer triple-bureau protection, looking at your information across all three credit bureaus.
Experian IdentityWorks℠ Premium monitors all three of your reports to make you aware of activity including score changes,new inquiries and accounts opened in your name, changes to your personal information and suspicious activity detected. Plus, you’ll regularly receive updates to your FICO Score.
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On Experian's secure site
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Free for 30 days, then $9.99 to $19.99 per month
Credit bureaus monitored
Experian for Plus plan or Experian, Equifax and TransUnion forPremium plan
Credit scoring model used
FICO®
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*Identity Theft Insurance underwritten by insurance company subsidiaries or affiliates of American International Group, Inc. (AIG). The description herein is a summary and intended for informational purposes only and does not include all terms, conditions and exclusions of the policies described. Please refer to the actual policies for terms, conditions, and exclusions of coverage. Coverage may not be available in all jurisdictions.
The best and most accurate way to keep tabs on your industry-specific FICO score is withFICO® Basic, Advanced and Premiercredit monitoring services.
All plans offer access to 28 versions of your FICO score, including scores for credit cards, mortgages and auto loans. Plus you'll receive $1 million identity theft insurance and 24/7 access to U.S.-based identity theft experts who can help restore your identity if your information is compromised.
FICO® Basic, Advanced and Premier
On myFICO's secure site
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$19.95 to $39.95 per month
Credit bureaus monitored
Experian for Basic plan or Experian, Equifax and TransUnion forAdvanced and Premier plans
Credit scoring model used
FICO
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Identity insurance
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Learn more:
- Should you pay for Experian credit monitoring? Here's how the free and paid plans compare
- 3 tips for refinancing your mortgage, even with a bad credit score
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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Now, let's dive into the concepts mentioned in the article you provided.
Credit Scores and Lenders' Evaluation
A credit score is a three-digit number that indicates an individual's creditworthiness. Lenders use credit scores to evaluate borrowers for credit cards, loans, and mortgages. While credit scores are not a complete snapshot of an individual's overall financial picture, they play a significant role in lending decisions.
Multiple Versions of Credit Scores
There are multiple versions of credit scores, and they hold different meanings for lenders. For general lending decisions, such as personal loans and credit cards, lenders commonly use the FICO Score. The FICO Score is calculated by the data analytics company Fair Isaac Corporation based on data from credit reports. Another well-known scoring model is VantageScore.
Credit Scores for Mortgage Applications
When applying for a mortgage, it's important to be aware that the credit score used in the application may differ slightly from the one individuals are used to seeing. Mortgage lenders use a slightly different credit score model specifically tailored for evaluating mortgage applicants. The FICO scores commonly used by banks for mortgage applications are FICO Score 2 (Experian), FICO Score 5 (Equifax), and FICO Score 4 (TransUnion).
Differences in Credit Score Models
Each of the three main credit bureaus (Equifax, Experian, and TransUnion) uses a slightly different version of the industry-specific FICO Score. While the core factors considered in credit scoring remain the same (payment history, credit use, credit mix, and age of accounts), the categories may be weighed differently in the scoring models used for mortgage applications. This is because borrowing and paying off a mortgage require a different mindset compared to managing credit card balances.
Tri-Merge Credit Score
Mortgage lenders typically pull credit scores from all three credit bureaus (Equifax, Experian, and TransUnion) in a process called a "tri-merge." If all three scores are the same, the lender's choice is simple. However, if the scores differ, the lender typically uses the median score as the qualifying credit score. If two of the three scores are the same, the lender uses that score, regardless of whether it is higher or lower than the third score. When applying for a mortgage with another person, such as a spouse or partner, each applicant's FICO 2, 4, and 5 scores are pulled, and the lender identifies the median score for both parties .
Impact of Credit Score on Interest Rates
Knowing your credit score is crucial for getting the best interest rates on your mortgage. Higher credit scores generally result in lower interest rates. For example, a borrower with a credit score above 760 may qualify for a 30-year fixed mortgage with an interest rate of 2.377% APR, while a borrower with a score between 620 and 639 (considered subprime) may face an interest rate of 3.966%.
Monitoring Credit Reports
Since mortgage lenders consider all three credit reports and scores, it may be beneficial to consider a paid credit monitoring service that provides more comprehensive data than a free version. These services can monitor all three credit bureaus and provide updates on score changes, new inquiries, accounts opened in your name, changes to personal information, and suspicious activity. Some credit monitoring services also offer identity theft insurance.
I hope this information helps! If you have any further questions, feel free to ask.
