What is a FICO® Credit Score and its Importance When Obtaining a Mortgage

A FICO® Score is a type of credit score that plays a crucial role in the mortgage application process. Derived from the Fair Isaac Corporation, which launched this scoring model in 1989, the FICO® Score aids lenders in assessing the creditworthiness of borrowers.

Understanding the FICO® Score

A FICO® Score is a numerical representation of an individual’s credit risk, based on data from their credit reports obtained from the three major credit reporting bureaus, namely Equifax, TransUnion, and Experian. These scores generally range from 300 to 850, with higher scores indicating better credit risk.

The Different Versions of FICO® Score

Interestingly, each credit bureau has a distinct FICO® Score for each individual, as they each maintain their own version of the person’s credit report. Additionally, FICO® creates various credit-scoring models for lenders in different industries, meaning the base FICO® scores may differ from the ones a mortgage lender sees if they request mortgage-specific FICO® scores.

For mortgage applications, lenders commonly use:

• FICO® Score 2, or Experian/Fair Isaac Risk Model v2
• FICO® Score 5, or Equifax Beacon 5
• FICO® Score 4, or TransUnion FICO® Risk Score 04

Importance of FICO® Score When Obtaining a Mortgage

When applying for a mortgage, the borrower’s FICO® Score is a key factor that lenders examine. This score can significantly impact the borrower’s ability to secure a loan and the interest rate they are offered. Typically, better scores lead to better loan terms, hence the importance of having a good FICO® Score when applying for a mortgage.

For example, here’s a breakdown of how FICO® scores can affect mortgage interest rates (based on November 2020 data):

• FICO® score 760–850: Interest rate 2.36%
• FICO® score 700–759: Interest rate 2.59%
• FICO® score 680–699: Interest rate 2.76%
• FICO® score 660–679: Interest rate 2.98%
• FICO® score 640–659: Interest rate 3.41%
• FICO® score 620–639: Interest rate 3.95%

How FICO® Scores Are Used in Mortgage Decisions

When a mortgage lender evaluates an application, they typically request FICO® Scores from all three credit bureaus (a process known as a “tri-merge” report). However, only one score is used for the final lending decision:

• If all three scores are the same, the lender uses that score.
• If the scores differ, the lender uses the median score as the qualifying credit score, not the highest or lowest.
• If two of the three scores are identical, the lender uses that score, regardless of whether it’s higher or lower than the other one.

Moreover, when multiple individuals apply for a mortgage together (such as a spouse or partner), each applicant’s FICO® Scores are pulled. The lender identifies the median score for both parties, then uses the lower of the final two.

Getting Your FICO® Score

For consumers to see their actual FICO® Score, it is recommended to use an authorized FICO® Score retailer. These scores can be easily bought online from the MyFICO website, and some banks or creditSure, here are some of the top 10 mortgage lenders in the U.S. as of 2023, according to Bankrate:

1. Quicken Loans/Rocket Mortgage
2. Guild Mortgage
3. Better.com
4. Fairway Independent Mortgage Corporation
5. Loan Depot
6. Caliber Home Loans
7. Guaranteed Rate
8. Citi Mortgage
9. Wells Fargo Home Mortgage
10. Bank of America Home Loans.

Each of these lenders offers different types of mortgages and has different requirements and rates. Therefore, it would be beneficial to shop around and get quotes from different lenders to find the best mortgage for you.

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