Additionally, FICO also creates many different credit-scoring models for lenders in different industries. Lending a huge amount of money is risky business. Different lenders have different requirements for their loans. When a loan officer gets your mortgage application, they may use a pricing grid to figure out how your credit scores affect your interest rate, says Yves-Marc Courtines, a chartered financial analyst with Boundless Advice. Generally, higher scores can mean a lower interest rate, and vice versa.
From there, a mortgage loan officer will likely look at the rest of your loan application to decide whether your base interest rate needs any adjustments.
You probably already know that a lower interest rate means a smaller monthly payment. But do you know just how big of an effect a smaller monthly payment can have?
According to the U. The credit score models take into account multiple factors including your current and past credit accounts, payment history, credit capacity e. There are variations between the different FICO models but the underlying inputs and scoring factors are relatively similar. Making your loan payments on time, maintaining low credit utilization and limiting the number of credit accounts you have open leads to higher credit scores for all FICO scoring models.
Although the FICO models utilize a consistent methodology, there may be differences in your credit scores across the three main credit bureaus. Score differences may be attributable to inconsistent account information or subtle differences in how accounts or credit events are weighted by the models. For example, it is not uncommon for an account to appear on your credit report provided by one of the bureaus but not the other two.
The presence or absence of certain account information can impact your credit score for that bureau and create differences in your scores.
Given the possibility that you could have a different credit score for each credit bureau you may be wondering what score lenders use when you apply for a mortgage? If you have three different credit scores, the lender uses your middle score to determine you mortgage pricing and ability to qualify for the loan. If two of your credit scores are the same, the lender uses that score, regardless of how that score compares to the third score.
If you only have two credit scores, the lender uses the lower score for your application. The example below demonstrates the credit score that mortgage lenders use when you have different score across the three credit bureaus.
In this scenario, the lender uses the middle of the three scores -- -- for the mortgage application. The second example below shows the credit score mortgage lenders use when two of the scores are the same. In this case, the lender uses the credit score that is repeated -- -- even though the third score is lower.
When two people apply for a mortgage, the lender uses the average median score for the applicants to evaluate their application. For example, if your middle credit score is and your co-borrower's middle score is , the lender uses the average score of to determine your mortgage rate and to assess the loan programs you are eligible for.
It might even be different than what comes up when you monitor 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. 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 on revolving 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. According to Darrin 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. If all three of your scores are the same, then their choice is simple.
But what if your scores are different? 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. Knowing your credit score is the first step in getting the best rates on your mortgage.
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