What Do Mortgage Lenders Look for on Credit Reports?

Written by Elizabeth BoydSeptember 8th, 20226 minute read

What credit report do mortgage lenders use? | What mortgage lenders look for | Steps to improve your credit report | Summary

When you apply for a mortgage, the first thing a lender will do is obtain a copy of your credit report. They'll want proof of responsible credit behavior, that you’re not seeking a lot of new credit, and that you pay your bills on time.

Consequently, it's a good idea to monitor your credit, and there are many ways to check your credit for free. Finally, you should clean up your credit report as much as possible before a lender sees it, rather than being put in the position of having to "explain away" any problems.

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What credit report do mortgage lenders use?

Mortgage lenders review credit reports from all three credit bureaus (Equifax, Experian, and TransUnion) when you apply for a home loan. However, they only use the middle FICO score when qualifying you for a mortgage and setting your interest rate.

For example, if your score is 645 from Experian, 671 from TransUnion, and 682 from Equifax, the lender will use the middle score of 671.

What do mortgage lenders look for on credit reports?

👉 Jump to section: Credit score | Past bankruptcies | Other factors

Credit score

Your FICO mortgage score is a good starting place for lenders, acting as a barometer of overall credit health. In addition, supporting information from your tri-merged credit report helps the lender form a clearer picture of how you handle debt and whether you pose a risk of defaulting on payments.

Your payment history, level of debt, credit history, credit mix, and recent activity all have a weight in your overall credit score.

Late payments, charge-offs, and collections accounts can drag your score and credit reputation down. But a good payment history suggests that lenders can trust you to pay back a new loan.

Late payments on a credit card or loan show up as delinquent accounts on your credit report. In extreme cases, the lender may send it to collections when you stop paying the debt. Someone with a good credit score but unpaid collections in their history may still have difficulty qualifying for a mortgage.

The amount of debt you carry speaks to whether you can afford to take on more debt and if you’re responsible with the credit you already have. Lenders like to see high credit availability and low usage.

Shoot for a credit utilization ratio of less than 30%. So if you have $20,000 in available credit, your outstanding balances shouldn’t exceed $6,000 — though lower is better.

» SEE: Credit Card Utilization Calculator

This metric identifies your oldest existing credit account and the average account age. A longer credit history is better than a short one, so don’t cancel your old cards before applying for a mortgage. Plus, opening a new account lowers your account age average.

Having a mix of the type of credit you have (including credit cards and auto loans) is beneficial — but when only paired with a good history of credit use and payments.

When you apply for new credit, a hard inquiry hits your credit score and stays on your credit report for two years, so avoid looking for credit before seeking a mortgage.

However, soft inquiries (usually from preapprovals and consumers checking their own credit) don’t have an impact.

Past bankruptcies, foreclosures, or court filings

Bankruptcies may be reported for up to 10 years, while foreclosures, short sales, judgments, and lawsuits could remain for 3–7 years.

Borrowers initially take a big credit hit after a bankruptcy, severely damaging their payment history and credit score.

Some lenders view borrowers with foreclosures on their record as too risky. Although others may approve a mortgage three years after the action, those loan terms will likely be unsatisfactory with a high interest rate.

Some lenders will approve an applicant for a mortgage within a few years of a Chapter 7 bankruptcy discharge.

Lender
Post-bankruptcy approval
Conventional
4 years
FHA
2 years
USDA
3 years
VA
2 years

The impact on your creditworthiness varies depending on the specifics of the case.

Other factors mortgage lenders look at

  • Debt-to-income ratio: a comparison of your monthly gross income to your monthly debt payments — it helps lenders calculate whether you can afford a mortgage payment
  • Down payment: must be at least 3.5% for FHA loans and 20% for conventional loans — larger down payments make you a more attractive borrower
  • Loan term: 30 years is a standard mortgage term, but you can qualify for better rates and terms if you can afford a shorter term (like 10, 12, or 15 years)
  • Employment history: must prove a steady income with stable employment history — typically at least two years with the same employer
  • Liquid assets: you may qualify for better terms with healthy liquid assets (e.g., investment income, savings, money market, securities)
  • Other collateral: high-asset individuals may secure a collateral loan, where the lender can take your cars, boats, life insurance, stocks and bonds, or real estate if you default on the mortgage

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How to improve your credit report before applying for a mortgage

  1. Review your credit report
  2. Correct any errors
  3. Start repairing your credit
  4. Ask your lender about Rapid Rescore
  5. Compare more lenient loan programs

Step 1: Check your credit report

You have the right to a copy of your credit report from Equifax, Experian, and TransUnion once a year at AnnualCreditReport.com. You can also check your credit score for free via many online services.

If a creditor declined your credit within the past 30 days, they must furnish you with a copy of your credit report for free, disclosing the contents and the name of the credit-reporting agency that provided the information.

Carefully check all the information on your credit report, including background information such as:

  • Current and past employment
  • Address information
  • Salary figures

Step 2: Correct any errors or out-of-date information

A review of your credit history might well reveal inaccurate or incomplete information. Correcting the inaccuracy will improve your debt-to-income ratio and credit score and strengthen your credit record.

The best way to update your credit report is to contact the credit provider directly and ask them to kindly correct the information on your credit report.

» LEARN: What Is the Fair Credit Reporting Act?

Check that the following are accurate and current:

  • Credit accounts listed in your name. Sometimes, similarities and other factors, an account can be reported incorrectly on someone else's credit report. Information reported on your credit report with people with a similar name or social security number can also occur.
  • Outstanding credit balances
  • Past due amounts
  • Activity or status dates — this is especially important on accounts with an unfavorable rating since these accounts will remain on your credit report for seven years from your most recent or final payment date.

Be on the lookout for these errors:

  • "Duplicate submissions" (i.e., the same amount is reported twice)
  • Account numbers that are transposed or contain minor variations
  • Paid-off credit accounts that still reflect a substantial balance due

Step 3: Start taking steps to repair your credit

  • Remove harmful data on your credit report, like high balances, collections, or charge-offs.
  • Pay down debt and settle old unpaid accounts that won’t fall off your report before you apply for a mortgage.
  • Consider a credit repair professional if your credit health has been severely damaged and you can't repair it yourself.

Step 4: Ask your lender about Rapid Rescore

Once you pay down some debt, you can boost your score in a short period. Ask your lender to request an update to your credit report via the Rapid Rescore Service.

Updating a credit report typically takes 30–60 days, but the Rapid Rescore Service can update it in as little as 3–5 days.

» LEARN: Rapid Rescore Service

Step 5: Consider loan options with more lenient credit requirements

Some loan programs are less strict about credit qualification criteria than conventional lenders.

Review these options to see if you may be eligible for one:

  • HomeReady loan. This program helps low-to-moderate income families buy homes. Eligible borrowers with credit scores of 620 or higher may qualify.
  • FHA loans. You may qualify for this government-backed home loan program with a 620 score or 580 with a 3.5% down payment.
  • USDA loans. Homes in targeted rural areas qualify, and borrowers must meet maximum income restrictions. The credit score requirement is typically 640, sometimes lower.
  • VA loans. Qualified military members and eligible surviving may be approved with a score as low as 620. However, borrowers with a 660 score or higher have better approval odds.

» MORE: Mortgages for Someone with Bad Credit

Ready to become a homeowner? Take these steps:

  1. Start reaching out to lenders to determine credit standing, options, and your potential budget.
  2. Compare several lenders to weigh options and find the best rate and terms for you.
  3. Secure preapproval with your chosen lender.
  4. Find a local real estate agent to discuss options and start touring homes.

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Summary

  • In a home loan application, mortgage lenders review the five categories used to calculate your credit score: payment history, credit utilization, length of credit history, credit mix, and new credit.
  • Lenders want to see a borrower with a proven record of responsible credit use and current low debt through a mix of credit accounts.
  • Monitoring your credit score and reviewing your credit reports lets you resolve problems before applying for a mortgage. Paying down existing debt can help improve your mortgage approval odds.