Why your mortgage credit score is lower than you think

Craig Berry
Craig Berry
The Mortgage Reports Contributor
May 17, 2022 - 9 min read

Your mortgage credit score might not be what you expect

Many home buyers don’t realize they have more than one credit score. And the score a mortgage lender uses may be lower than the one you see when you check your own credit.

Finding out late in the game that you have a lower credit score could be an unwelcome surprise. You might end up with a higher interest rate and a smaller home buying budget than you’d planned.

So before you apply, it’s important to understand how lenders look at credit and what score you need to qualify.


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What does my credit score need to be for a mortgage?

The minimum credit score required to get a mortgage varies by loan type:

Type of LoanMinimum Credit ScoreMinimum Down Payment
Conventional Loan6203%
FHA Loan58013.5%
USDA Loan64020%
VA Loan580-62020%
Jumbo Loan700-74010-20%

1With a credit score between 500-579 you may still qualify for an FHA loan if you can put at least 10% down.

2No minimum credit score established by either the USDA or VA, but lenders are allowed to set their own requirements.

If you’re a first-time home buyer, you may be surprised you could get approved for a mortgage loan with a credit score below 600.

But the score you see in a credit monitoring app, or in your credit card statement, won’t necessarily be the score your lender sees when it pulls your credit.

The score your lender sees will likely be lower. So if your credit is borderline, you’ll want to understand how lenders evaluate your credit score and credit history before moving forward with a loan application.

Why is my mortgage credit score so much lower?

There can be a disconnect between the credit scores you obtain for free and the ones your mortgage lender is using.

Typically banks, credit card companies, and other financial providers will show you a free credit score when you use their services. Also, credit monitoring apps can show free credit scores 24/7.

But the scores you receive from those third-party providers are meant to be educational. They’ll give you a broad understanding of how good your credit is and can help you track overall trends in your creditworthiness. But they aren’t always totally accurate.

That’s partly because free sites and your credit card companies offer a generic credit score covering a range of credit products.

Lenders use a different credit scoring model

Creditors and lenders use specific industry credit scores customized for the type of credit product for which you’re applying.

For example, auto lenders typically use a credit score that better predicts the likelihood that you would default on an auto loan. Mortgage lenders, on the other hand, pull FICO scores from the three main credit bureaus — Equifax, TransUnion, and Experian — and use the mid score.

Mortgage lenders use a tougher credit scoring model because they need to be extra sure borrowers can pay back large debts.

Since mortgage companies loan money on the scale of $100,000 to $1 million, they’re naturally a little stricter when it comes to credit requirements.

Mortgage lenders will use a tougher credit scoring model because they need to be extra sure borrowers can pay back those large debts. So there’s a good chance your lender’s scoring model will turn up a different — sometimes lower — score than the one you get from a free site.

Where to check your FICO score before applying for a mortgage

Many free credit services don’t use the FICO scoring model, which is the one your mortgage lender will be looking at. To be sure the score you check is comparable to what a mortgage lender will see, you should use one of these sites:

Whether it’s free or you pay a nominal fee, the end result will be worthwhile. You can save time and energy by knowing the scores you see are in line with what your lender will see.

A good credit score is achievable as long as you continue to make your payments on time, keep your credit utilization relatively low, and don’t shop for new credit. Over time, your score will increase for every credit scoring model.

How your credit score affects your mortgage eligibility

When it comes to getting a mortgage, your credit score is incredibly important. It determines:

  • What loan options you qualify for
  • Your interest rate
  • Your loan amount and home price range
  • Your monthly payment throughout the life of the loan

For example, having a credit score of “excellent” versus “poor” could fetch lower interest rates, which can save you over $200 per month on a $200,000 mortgage.

And if your credit score is on the lower end, a few points could make the difference in your ability to buy a house at all. So, it makes sense to check and monitor your credit scores regularly, especially before getting a mortgage or other big loan.

The challenge, however, is that there’s conflicting information when it comes to credit scores.

There are three different credit agencies and two credit scoring models. As a result, your credit score can vary a lot depending on who’s looking and where they find it.

How credit reporting bureaus affect your score

As many consumers already know, there are three major credit reporting agencies.

  • Equifax
  • Transunion
  • Experian

While it’s possible your scores will be similar from one bureau to the next, you’ll typically have a different score from each agency.

That’s because it’s up to your creditors to decide what information they report to credit bureaus. And it’s up to the creditors to decide which agencies they report to in the first place.

Since your credit scores depend on the data listed on your credit reports, more than likely you won’t see the exact same score from every credit reporting agency.

Fortunately, most agencies look at similar factors when calculating your credit scores. As long as you manage credit cards and loans responsibly, your credit scores should be fairly similar to one another.

But different credit reporting agencies aren’t the only challenge. There are also different credit scoring models. And, as if that didn’t already complicate matters, there are also different versions of these models.

How credit scoring models affect your score

In the old days, banks and other lenders developed their own “scorecards” to assess the risk of lending to a particular person. But these scores could vary drastically from one lender to the next, based on an individual loan officer’s ability to judge risk.

To solve this issue, the Fair Isaac Corporation (formerly Fair, Issac, and Company) introduced the first general-purpose credit score in 1989. Known as the FICO Score, it filters through information in your credit reports to calculate your score.

Since then, the company has expanded to offer 28 unique scores that are optimized for various types of credit card, mortgage, and auto lending decisions.

But FICO is no longer the only player in the game. The other main credit scoring model you’re likely to run into is the VantageScore.

Jeff Richardson, vice president for VantageScore Solutions, says the VantageScore system aimed to expand the number of people who receive credit scores, including college students and recent immigrants, and others who might not have used credit or use it sparingly.

FICO vs. VantageScore

Prior to VantageScore’s launch in 2006, the financial services industry operated with only one choice in credit scoring systems. The overwhelming majority of decisions involving credit applications were influenced by one scoring company: FICO.

VantageScore gave lenders a second, equally effective option.

Prior to FICO allowing credit card issuers to give away their scores to their customers, VantageScore was the only non-educational credit score being given to consumers on a large-scale basis. The VantageScore model is designed to make it easier for consumers to build credit scores.

FICO matters most when you want a mortgage

VantageScores are the ones that most consumers see available on free websites. But most mortgage lenders only consider FICO scores.

VantageScore uses data such as rent, utility, telecom billing information, public records, and older credit file information to develop a profile of consumers. Also, your credit history will be recognized more quickly with VantageScore because it will look at the first month of reported credit activity.

FICO, on the other hand, requires that an account be open for at least six months before issuing a score.

In addition, VantageScore has been credited with creating the free credit score market. This is the score most consumers see available on free websites and apps. VantageScores are typically used by:

  • Credit card issuers
  • Personal and installment loan companies
  • Auto lenders
  • Credit unions
  • Banks
  • Tenant screening, telecommunications and utility companies
  • Consumer websites
  • Government entities

But mortgage lenders still predominantly use FICO scores.

How your credit scores are made and why they matter

Since there are few numbers that matter as much to your financial well-being as your credit score, it helps to know what your scores mean and how they work.

First, know that there’s a big difference between a credit report and a credit score.

  • Your credit report is a record of your borrowing history. Each loan or line of credit you’ve opened, dates on those accounts, payment history (including late or missed payments), and so on. Overall, it shows how reliably you manage and pay back your debts
  • Your credit score sums up your credit report in a single number. It weighs every item on your credit report to come up with an overall score (usually between 300 and 800) that sums up how responsible of a borrower you are

The big three credit bureaus operate in the realm of credit reporting. Each one keeps a separate record of your borrowing history, based on the information your creditors send them.

The other players in the game — FICO and VantageScore — are responsible for credit scoring. They determine your score based on what’s included in those credit reports.

For example, keeping your credit utilization ratio low can help your credit scores, while repeatedly neglecting to pay your credit card bills on time can hurt them.

Why do credit scores matter?

Ultimately, your credit score is important in many ways. To give just a few examples:

  • Your credit score determines the types of loans you can get
  • It determines the mortgage interest rates you pay
  • It affects how large of a house or how expensive of a car you can afford
  • Insurers in most states use credit scores to set premiums for auto and homeowners coverage. Policyholders with bad credit scores often pay more
  • Credit score impacts your credit card interest rates
  • Landlords use credit scores to decide who gets to rent their apartments
  • Cell phone companies might require a deposit if your credit is too low

Whether you’re looking for a mortgage or any other financial product, your credit score makes a big difference. That’s why it’s so important to know yours before you apply.

Credit score requirements can be flexible

Meeting your lender’s minimum credit score requirement can go a long way toward qualifying for homeownership.

But lenders don’t etch these numbers into stone, and there’s no guarantee you’d qualify just because your FICO score meets the mark. That’s because your credit score is only one factor lenders look at on your mortgage application.

For example, even if you have a credit score of 620 — the minimum required for a conventional mortgage — you still might not qualify if your debt-to-income ratio (DTI) exceeds the lender’s limits or if you can’t document a steady income for the past two years.

Why are credit scores lower for FHA loans?

If you have a low credit score, your loan officer or online preapproval process may direct you to an FHA loan.

FHA loans are so named because the Federal Housing Administration, or FHA, insures them. With government insurance protecting these loans, lenders can offer competitive interest rates even if your score wouldn’t qualify you for a conventional mortgage.

FHA insurance helps borrowers with lower credit scores get loans with lower mortgage rates and low down payment requirements. But this flexibility costs money. Your loan would require an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount. That’s $4,375 if you’re getting a $250,000 home loan.

You’ll also pay an annual MIP which typically costs 0.85% of the loan balance each year. Later, once you’ve paid down the balance enough, you could refinance into a conventional mortgage to eliminate these extra premiums.

Conventional or “conforming” mortgages — loans that follow rules set by Fannie Mae and Freddie Mac — will need private mortgage insurance (PMI) unless you’re making a down payment of 20% or more.

But with conventional loans you can stop paying PMI once you’ve paid off 20% of the loan amount.

Do you qualify for a mortgage?

Credit guidelines for mortgages are a lot more flexible than many people think. In fact, it’s often possible to qualify with a score of 580 or higher.

Whether you are a first-time home buyer or refinancing your current home loan, you can check your own credit score online, or talk with a lender to see whether you qualify for a mortgage based on your current score.


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