A mortgage lender checks more than one number when you apply. Your credit score can affect the interest rate you are offered, but the lender also reviews your income, debts and other parts of your finances. Which score does the lender see, and what happens when you ask several lenders for offers? Those questions are worth understanding before you apply.
Credit score versus credit report
Your credit report is a record of credit accounts, payment history and inquiries, which are records of credit checks. Your credit score is a number calculated from information in that report. A mortgage lender may review both, but they serve different purposes: the report shows details of your history, while the score summarizes some of that information.
Higher scores generally reflect a stronger credit history and can make a borrower eligible for a lower interest rate. Still, a score alone does not decide a mortgage application. The Consumer Financial Protection Bureau (CFPB) explains that lenders consider other information too. And because a score draws from a report, a mistake in the report may affect the number a lender sees.
Which score does a lender use?
You may have more than one credit score. Equifax, Experian and TransUnion, the three major credit reporting companies, may hold different information about your accounts. Scores can also vary with the scoring model used. That helps explain why a number you saw earlier may differ from the number used in a mortgage review.
According to the CFPB, most mortgage lenders use FICO scores, and many obtain scores based on reports from all three major credit reporting companies. For a borrower with three scores, lenders commonly use the middle score, not the highest or the average, when deciding what rate to offer. If the scores are 690, 710 and 730, the middle is 710. That example shows the sorting step, not what rate or approval decision any borrower would receive.
Rules for selecting a score can become more involved when an application has multiple borrowers. Fannie Mae’s lender guide, for example, sets out requirements for determining a representative score for a loan. If you want to know which scores will be used on your application, ask the lender rather than assuming the score you checked is the one it will use.
A score is one part of the decision
A lender may also examine your existing debt, savings, total assets, current income and credit history with that lender. Two applicants with the same score can therefore receive different decisions or rates. A lender’s interest rate offer depends on several factors, some of which a borrower cannot control.
Why pay attention to a small rate difference? Interest is the cost of borrowing, and a mortgage can last for decades. Freddie Mac notes that a difference of one-quarter of a percentage point can amount to thousands of dollars over the life of a home loan. The amount for any particular loan depends on its terms. Comparing offers means looking at the actual rates and costs presented to you, rather than trying to predict an offer from a score alone.
What happens when lenders check your credit?
When a lender checks your credit for a mortgage application, the check creates an inquiry. An inquiry typically has a small negative effect on a score. That can make borrowers reluctant to compare offers, but mortgage shopping receives special treatment in scoring.
The CFPB says multiple mortgage credit checks within a 45-day window count as a single inquiry for credit-scoring purposes. The checks can still appear individually on a credit report; counting them as one describes their scoring treatment. The CFPB says the credit impact is the same when the last lender’s check falls within 45 days of the first. An additional check outside that window usually has a small effect, so concern about one more inquiry need not obscure the potential value of comparing offers.
Applications for a credit card or car loan are different from mortgage-rate shopping. They can add inquiries or new accounts and may lower a score. If you are preparing for a mortgage, it helps to understand how those applications might change the information a lender reviews.
What can you check before applying?
Start with the underlying report. Are the listed accounts and payment details accurate? Reviewing your reports well before applying leaves time to address errors that might affect a score or rate. For instructions on correcting a mistake, use current guidance from the CFPB and the credit reporting company involved.
When comparing mortgage offers, ask which scoring model and credit reports the lender uses. You can also ask when it expects to check your credit and what interest rate each offer reflects. The 45-day shopping window describes how qualifying mortgage inquiries are treated for scoring; it does not guarantee that every offer will have the same terms.
Finally, score requirements can change. The Federal Housing Finance Agency describes changes to credit-score policy for loans involving Fannie Mae and Freddie Mac, while those organizations publish lender-side requirements. For a current application, confirm the applicable requirements with the lender or consult the relevant official guidance. The useful starting question remains simple: what information will this lender use to evaluate this loan?
Please seek a professional. This article is general information, not financial, tax or insurance advice. Please seek a licensed financial, tax or insurance professional about your own situation.
