The Mystery of FICO Scores Solved: The Why and How of Mortgage Lender Credit Inquiries

Your credit score is the backbone of your financial life, primarily because all lenders, and other potential creditors, use it to determine your level of responsibility with money. The higher it is, the more likely access to affordable borrowing is in your future. However, you have more than one credit score out there in the universe. Different types of lenders evaluate different types of credit or FICO scores in an effort to gauge how strong – or risky – you may be as a borrower. This impacts how much you pay for financing on a new car, a personal loan, and a mortgage.

Understanding what credit scores you have and how they are used to impact the mortgage application and approval process is essential to boosting your financial know-how. Here’s what you need to understand about credit scores and mortgage lending.

The FICO Score Breakdown

Let’s start with a breakdown of your FICO credit scores. FICO stands for Fair Isaac Corporation which is the leading analytics software company offering credit scores on both consumers and businesses. Consumers credit scores from FICO help lenders understand the financial track record of borrowers. This is accomplished through a specific algorithm that generates a three-digit score based on an individual’s payment history, current and past outstanding debts, inquiries from creditors, and negative marks like bankruptcy or tax liens. The stronger your financial history, the higher that three-digit score.

While that rundown may seem simple on the surface, things get confusing because FICO has developed more than 50 versions of credit scores, used specifically by different types of creditors. It doesn’t stop there, though. Consumers have other types of credit scores above and beyond FICO, including VantageScores, which work in a similar method but may generate a different score for each consumer. If you check your credit score through a service like Credit Karma, for instance, you are viewing your VantageScore, not FICO. Even though this gives you an idea of your credit standing, it is important to recognize that 90% of the top U.S. lenders use FICO in making credit decisions.

So why are there so many credit score versions out there? Creditors are looking for specific details about your credit history, and certain versions of your FICO score offer more insight than others. For example, an auto lender may use an Auto FICO score while a mortgage lender uses the Mortgage FICO score.  FICO 8, which is more sensitive to highly-used credit cards and higher balances is used by many consumer sites but it isn’t often used by mortgage or auto lenders because it doesn’t provide the information they need to make a lending decision.

Specific to mortgage lenders, there are three versions of the FICO score used primarily, including:

  • Equifax Beacon 5.0 (FICO 5)
  • Experian/Fair Isaac Risk Model v2 (FICO 2)
  • TransUnion FICO Risk Score 04 (FICO 4)

The reason behind the use of these three FICO scores is simple: the versions listed above give mortgage lenders the most comprehensive analysis of borrower risk from all three credit reporting agencies, specific to taking out a home loan. In other words, they give the most accurate information to mortgage lenders about your overall credit.

How Mortgage Lenders Use FICO Scores

So, FICO 2, 4 and 5 scoring versions are used by nearly all mortgage lenders to evaluate a new application, but there are times when these scores aren’t the same for a single borrower. This is because each credit bureau (Equifax, Experian, and TransUnion) all have different versions of FICO scores they provide to lenders, and some of the data used to generate a score is reported differently to each agency. Fortunately, mortgage lenders have a system for determining which score to use for borrowers when things don’t match perfectly. Here are the general guidelines:

If all three scores are different, a lender uses the middle score; if two scores are the same, that score is used, without considering if the repeated scores are higher or lower than the third. When there are two borrowers for a new mortgage application, the score selection falls in line with the same process. However, the lower of the two selected scores between both borrowers is ultimately used.

There’s No Reason to Worry

The FICO scoring versions may make your head spin a little, but there is no reason to get anxious about the process. Some borrowers feel uneasy about lenders pulling multiple scores from multiple places, and the impact that may have on their overall credit. However, it is actually in your best interest to have a mortgage lender pull a true and accurate credit score based on the versions above.

First and foremost, the only way a lender can get a clear idea of what you qualify for in terms of a new mortgage loan is with a hard credit pull from the three reporting agencies. Offering up your VantageScore or another version of a FICO score from a free or paid service doesn’t provide lenders the details they need to accurately determine your credit and what they can offer you. The credit scores you have access to are known as soft inquiries, which do not impact your credit score calculation. Hard inquiries, on the other hand, take place when you apply for a new loan, like a mortgage. While hard inquiries do have an impact on your credit score, mortgage inquiries are different. Multiple hard inquiries within a 30-day timeframe are bundled together so your score isn’t influenced negatively. In other words, it is safe to have a mortgage lender pull your credit information for the purpose of getting a new loan.

Credit scores can be confusing, that’s for sure, but there is a rhyme and reason to what score versions lenders use, and how they are evaluated to determine your creditworthiness. There is no need to worry about the hard credit pull by a mortgage lender, since this is the only way to know for sure what you qualify for in purchasing or refinancing a home. Pulling your FICO score through your mortgage advisor is important to accurately determine the loan terms they can offer you. 


Leave a Reply

get started