What Home Buyers Need to Know About Credit Scores

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Your credit score affects two big things when you buy a home: whether you qualify, and what interest rate you get. A difference of even 20 points can change your rate, and over a 30-year loan that adds up. Here are the basics every home buyer should know before talking to a lender.

What is a FICO score?

A FICO score is a three-digit number, from 300 to 850, that predicts how likely you are to repay a loan. It was created by Fair Isaac Corporation and is built from the data in your Equifax, Experian and TransUnion credit reports. Most mortgage lenders use FICO scores.

FICO weighs five things:

• Payment history (35%): whether you pay on time
• Amounts owed (30%): mostly how much of your card limits you’re using
• Length of credit history (15%)
• New credit (10%): recent applications and new accounts
• Credit mix (10%): cards, installment loans, and so on

FICO vs. VantageScore

The three credit bureaus created VantageScore as a competitor to FICO. It uses the same 300–850 range, but it weighs things differently, so the number can be quite different from your FICO score. Free apps like Credit Karma show VantageScore. That’s useful for watching trends, but don’t expect it to match what a mortgage lender sees. We explain why in why there are different credit scores.

Which score does a mortgage lender use?

Most mortgage lenders pull a “tri-merge” report with a score from each bureau, then use the middle of the three. These are older FICO versions (FICO Score 2, 4 and 5), not the FICO 8 you’ll see in most apps. Fannie Mae and Freddie Mac are phasing in newer models, but ask your loan officer which scores they actually pull.

FICO score ranges

• 800–850: Exceptional
• 740–799: Very good. This is usually where the best mortgage pricing starts.
• 670–739: Good
• 580–669: Fair. FHA loans allow 3.5% down with a 580+ score.
• 300–579: Poor

Conventional loans have traditionally needed about 620, but pricing improves in steps all the way up to 780. See what counts as a good credit score for more.

The do’s before you apply

• Check all three reports three to six months ahead and dispute any errors (see the real problem with credit reports).
• Pay card balances down before the statement closes. Under 30% of your limit helps, and under 10% is better.
• Pay every bill on time. One 30-day late payment can drop a good score significantly.
• Keep monitoring. SmartCredit alerts you to changes, so nothing surprises you or your lender.
• Rate-shop in a short window. Multiple mortgage inquiries within about 14 days usually count as one.

The don’ts

• Don’t open new credit cards or finance a car or furniture before closing.
• Don’t close old cards. That can raise your utilization and shorten your history.
• Don’t co-sign for anyone during the process.
• Don’t pay off an old collection without asking your loan officer first. The timing and method matter.

Need to raise your score first?

If errors are holding you back, Dovly automates disputes with TransUnion (see our Dovly review). If you have little credit history, a credit-builder account like Self adds on-time payments to all three reports. Our 7 tips to boost your score cover the fastest wins.

When you’re ready, The Rate Update can pull your scores, show you where you stand, and tell you exactly what would improve your rate.

Affiliate disclosure: some links on this page are affiliate links, and we may earn a commission if you sign up, at no extra cost to you. Dan Frio | NMLS #246527 | PBT Bancorp | NMLS #257781. Mortgage products are originated by PBT Bancorp, NMLS #257781. Equal Housing Lender.