Your credit score or FICO score tells the lender a lot about your ability to afford a loan. It’s the lender’s first glance at your financial responsibility. If you have a high FICO score, a lender is likely to move forward with your loan application to see if you can afford the loan. If you have a low FICO score, the lender is more likely to decline your application without moving forward.
So which FICO score do lenders use?
The Middle Score
Typically, lenders pull all three of your credit scores. This means your credit score from Equifax, Trans Union, and Experian. They look at these scores and take the middle score. For example, if you had the following scores, the lender would use the 675 credit score:
- Trans Union 680
- Equifax 675
- Experian 659
This is the case if you have three different credit scores.
Two of the Same Score
Now, if you have two scores that are the same, the lender will use that score. It doesn’t matter what the third credit score is, even if it’s lower than the two matching scores. For example:
- Trans Union 675
- Equifax 675
- Experian 655
Lenders would most likely ignore the 655 credit score and use the 675 credit score for qualifying purposes.
Using the Credit Scores of a Borrower and Co-Borrower
If you apply for a mortgage with another person, in other words, you have a co-borrower, things are a little different.
Lenders need to see the credit of both applicants. They will pull all three credit bureaus for each borrower. Again, they will find the middle score for each applicant individually, as we spoke about above. Then they will compare the two middle scores of each applicant and take the lower score of the two.
This can work against you if your co-borrower has a lower middle credit score than you. It is important to know what type of credit each of you has going into the process so that you know what might happen when you apply for a loan. If a co-borrower will hurt your chances of approval, you may want to leave him/her off the loan even it’s your spouse. But, if you need the co-borrower’s income to qualify for the loan, you may need to leave him/her on and just take the higher interest rate for the lower credit score.
Using Alternative Credit Sources
In some cases, borrowers don’t have a credit score. While it would seem like you shouldn’t be able to qualify for a loan without a credit score, you may be able to with alternative credit sources.
If you pay any type of bills on a regular basis, such as monthly, you may be able to use them as your credit source. A few common examples include:
- Insurance payments
- Utility payments
- Cell phone bill payments
- Rent payments
You typically need at least three credit sources to use the alternative credit method. Lenders will need proof from each credit score that you paid your bills on time and it must be written proof. You can also provide a copy of your last 12 months of canceled checks for the payment and/or your bank statements to prove the payments.
Keep in mind that not all lenders will use alternative credit scores. You may need to shop around a bit to find a willing lender.
It’s always a good idea to make sure your credit score is as high as possible before you apply for a mortgage. We suggest starting at least one year before you apply for the loan. You can pull a copy of your credit reports free of charge here. Pull all three credit reports to see what type of credit history you have. These reports won’t show your credit score, but it will give you a chance to fix any negative credit information reporting on your credit report.
The earlier you make the changes, the better chance you have of having the highest credit score possible. If you make your payments on time, don’t overextend your available credit, and don’t apply for new credit, you’ll increase your chances of having a high enough credit score to qualify for the loan you need.