Which FICO scores do lenders use?

This post comes from Rob Berger at partner site The Dough Roller.

As I've mentioned before, I've been on a refinancing binge. My wife and I have refinanced our home twice in the past 12 months, and my business partner and I are doing the same with three rental properties. With mortgage rates at an all-time low, these deals were just too good to pass up.

And this got me to thinking: Which credit scores do mortgage lenders use to qualify people for a mortgage?

It's an important question, as your credit score determines your mortgage rates or if you even qualify for a loan. While it's common knowledge that mortgage lenders use FICO scores, most people with a credit history have three FICO scores, one from each of the three major credit-reporting bureaus (Experian, Equifax and TransUnion). Do lenders average the three scores or take some other approach?

And what happens when two people buy a home together? Do lenders average their scores together?

So I did some research on the following questions:

• Which FICO formula (there's more than one, unfortunately) do mortgage companies use?
• For a single applicant, which of up to three FICO scores will be considered?
• For spouses, significant others or business partners, how do lenders evaluate creditworthiness?
• And finally, what if an applicant doesn't have FICO scores from all three credit bureaus?

Since most mortgage loans are sold to either Freddie Mac or Fannie Mae, I focused on the requirements for those types of loans. (Post continues below.)

Which FICO score is used?

FICO scores, developed by Fair Isaac Corp., have different names at each of the three major credit-reporting bureaus. And there are different versions of the FICO formula. Here are the specific versions of the FICO formula used by mortgage lenders:

• Equifax Beacon 5.0.
• Experian/Fair Isaac Risk Model v2.
• TransUnion FICO Risk Score 04.

Since most people have three FICO scores, one from each credit bureau, how do lenders choose which one to use?

For a FICO score to be considered usable, it must be based on adequate, concrete information. If there's too little information, or it's inaccurate, the score may be considered unusable. But if it is usable, here's how they decide which score to use for an individual borrower:

• If all three scores are different, they use the middle score.
• If two scores are the same, they use that score, regardless of whether the third score is higher or lower. 

If there is more than one applicant, the score to be used for each individual is calculated as described above. Then the mortgage lender uses the lower of those two credit scores.

In some situations, an applicant may not have a usable FICO score from one of the three credit bureaus. In that case, the mortgage lender will simply use the lower of the two scores that are available. And if two scores are not usable, they will use the one remaining score.

Now you may be wondering: What if a mortgage applicant has no usable FICO scores? Generally that person won't qualify for a mortgage. There are exceptions. If you fall into that category, contact a mortgage broker to see what options you have.

Obtaining FICO scores

If you are looking to buy a home or refinance your mortgage, how do you get a glimpse of your credit scores before applying? One option would be to pay for your FICO scores. However, unless you plan to apply for a mortgage immediately, the scores you obtain will likely change by the time a mortgage lender pulls them.

If you read my article on FAKO vs. FICO scores, you know that I purchased my FICO scores, and they were actually a less reliable indicator of the scores my lenders used than some free educational scores. There are a number of ways to get a free credit score, which is where I'd start. They're not perfect, but in my experience they're pretty close.

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