Key Takeaways
- FICO scores range from 300-850 and are used by 90% of top lenders; mortgage lenders typically use the middle score of three bureau scores
- Payment history accounts for 35% of FICO score, amounts owed 30%, length of credit history 15%, credit mix 10%, and new credit 10%
- Most conventional loans require minimum 620 FICO score, FHA requires 580 (3.5% down) or 500 (10% down), while VA and USDA have no statutory minimum
- Credit reports contain four sections: identifying information, credit accounts (tradelines), public records, and inquiries (hard and soft)
- Major derogatory marks include bankruptcies (7-10 years on report), foreclosures (7 years), collections, charge-offs, and judgments
- Credit utilization ratio (balances vs. limits) should ideally be under 30% for optimal scoring; high utilization significantly lowers scores
Last updated: January 2026
Credit Analysis
Credit analysis is a fundamental component of mortgage underwriting. Understanding how credit scores work, what credit reports contain, and how to interpret credit data is essential for MLOs.
Credit Scores Overview
A credit score is a three-digit number that represents a borrower's creditworthiness based on their credit history.
FICO Score Basics
| Factor | Details |
|---|---|
| Score Range | 300-850 |
| Developer | Fair Isaac Corporation (FICO) |
| Usage | Used by 90% of top lenders |
| Mortgage Version | FICO Score 2, 4, 5 (varies by bureau) |
How Mortgage Lenders Use Scores
When a borrower applies for a mortgage, lenders pull credit from all three bureaus:
| Bureau | FICO Version for Mortgages |
|---|---|
| Experian | FICO Score 2 |
| Equifax | FICO Score 5 |
| TransUnion | FICO Score 4 |
The Middle Score Rule: Lenders use the middle score of the three. If there are only two scores, the lower one is used.
Score Examples
| Experian | Equifax | TransUnion | Score Used |
|---|---|---|---|
| 720 | 705 | 730 | 720 (middle) |
| 680 | 710 | 695 | 695 (middle) |
| 650 | 670 | -- | 650 (lower of two) |
FICO Score Components
FICO scores are calculated based on five weighted categories:
The Five Factors
| Factor | Weight | Description |
|---|---|---|
| Payment History | 35% | On-time vs. late payments |
| Amounts Owed | 30% | Credit utilization, balances |
| Length of Credit History | 15% | Age of accounts |
| Credit Mix | 10% | Types of credit used |
| New Credit | 10% | Recent accounts, inquiries |
Payment History (35%)
The most important factor. Includes:
- On-time payment record
- Late payments (30, 60, 90, 120+ days)
- Collections, charge-offs, bankruptcies
- Public records (judgments, liens)
Impact of Late Payments:
| Severity | Score Impact |
|---|---|
| 30 days late | 60-110 points |
| 60 days late | 70-135 points |
| 90+ days late | 80-150+ points |
| Collection/Charge-off | 100-150+ points |
Amounts Owed (30%)
| Component | Ideal Range |
|---|---|
| Credit utilization ratio | Below 30% |
| Number of accounts with balances | Fewer is better |
| Installment loan balances | Progress on paying down |
Credit Utilization Example:
| Limit | Balance | Utilization | Impact |
|---|---|---|---|
| $10,000 | $2,000 | 20% | Good |
| $10,000 | $5,000 | 50% | Concerning |
| $10,000 | $9,000 | 90% | Damaging |
Length of Credit History (15%)
| Factor | What It Measures |
|---|---|
| Age of oldest account | Longer is better |
| Average age of accounts | Older average is better |
| Age of newest account | Very new accounts can lower average |
Credit Mix (10%)
Having a variety of credit types can help:
- Revolving credit (credit cards)
- Installment loans (auto, personal, student)
- Mortgage loans
- Retail accounts
New Credit (10%)
| Factor | Impact |
|---|---|
| Hard inquiries | Each can lower score 5-10 points |
| Multiple inquiries (mortgage shopping) | Treated as one within 45 days |
| New accounts opened | Multiple new accounts = higher risk |
Credit Score Ranges
Score Categories
| Range | Rating | Loan Options |
|---|---|---|
| 800-850 | Exceptional | Best rates, easiest approval |
| 740-799 | Very Good | Excellent rates, easy approval |
| 670-739 | Good | Competitive rates, solid approval |
| 580-669 | Fair | Higher rates, FHA eligible |
| 300-579 | Poor | Limited options, subprime |
Minimum Score Requirements by Loan Type
| Loan Type | Minimum Score |
|---|---|
| Conventional | 620 (generally) |
| FHA (3.5% down) | 580 |
| FHA (10% down) | 500 |
| VA | No statutory minimum (lender overlays apply) |
| USDA | No statutory minimum (lender overlays apply) |
| Jumbo | 700-720 (typically) |
Credit Report Components
A credit report contains several sections that underwriters review.
Four Main Sections
| Section | Contents |
|---|---|
| Identifying Information | Name, SSN, DOB, addresses, employers |
| Credit Accounts (Tradelines) | All credit accounts and history |
| Public Records | Bankruptcies, judgments, liens |
| Inquiries | Hard and soft credit pulls |
Understanding Tradelines
Each credit account (tradeline) shows:
| Data Point | Information |
|---|---|
| Creditor | Name of lender/creditor |
| Account Number | Partial number for identification |
| Account Type | Revolving, installment, mortgage |
| Date Opened | When account was established |
| Credit Limit/Amount | Original loan or credit limit |
| Current Balance | Amount currently owed |
| Payment Status | Current, 30/60/90 days late |
| Payment History | 24-84 months of payment data |
Tradeline Status Codes
| Status | Meaning |
|---|---|
| Open | Account is active |
| Closed | Account is closed |
| Paid | Installment loan fully paid |
| Collection | Account sold to collection agency |
| Charge-off | Creditor wrote off as loss |
Derogatory Credit Items
Derogatory marks significantly impact credit scores and mortgage approval.
Types of Derogatory Marks
| Type | Time on Report | Impact |
|---|---|---|
| Late Payments | 7 years | Moderate to severe |
| Collections | 7 years from first delinquency | Severe |
| Charge-offs | 7 years from first delinquency | Severe |
| Repossession | 7 years | Severe |
| Foreclosure | 7 years | Severe |
| Short Sale | 7 years | Moderate to severe |
| Chapter 7 Bankruptcy | 10 years | Most severe |
| Chapter 13 Bankruptcy | 7 years | Severe |
| Tax Liens (paid) | 7 years (removed for some) | Severe |
| Judgments | 7 years (removed for some) | Severe |
Waiting Periods After Major Events
| Event | Conventional | FHA | VA |
|---|---|---|---|
| Chapter 7 Bankruptcy | 4 years | 2 years | 2 years |
| Chapter 13 Bankruptcy | 2 years from discharge | 1 year with court approval | 1 year |
| Foreclosure | 7 years | 3 years | 2 years |
| Short Sale | 4 years | 3 years | 2 years |
Credit Inquiries
Hard vs. Soft Inquiries
| Type | Impact | Examples |
|---|---|---|
| Hard Inquiry | Can lower score 5-10 points | Loan applications, credit cards |
| Soft Inquiry | No score impact | Pre-approvals, employment checks, self-checks |
Rate Shopping Protection
When shopping for a mortgage, multiple inquiries within a 45-day window are treated as a single inquiry. This allows borrowers to compare lenders without damaging their credit.
Credit Improvement Strategies
MLOs should understand how borrowers can improve their credit.
Quick Improvements (Days to Weeks)
| Action | Potential Impact |
|---|---|
| Pay down credit cards | Reduce utilization, boost score |
| Become authorized user | Add positive history |
| Dispute errors | Remove incorrect negatives |
| Request credit limit increases | Lower utilization ratio |
Medium-Term Improvements (Months)
| Action | Potential Impact |
|---|---|
| Consistent on-time payments | Build payment history |
| Pay off collections | Remove or reduce impact |
| Limit new credit applications | Reduce hard inquiries |
| Keep old accounts open | Preserve credit history length |
What NOT to Do Before Applying
- Open new credit accounts
- Close old credit accounts
- Make large purchases on credit
- Co-sign for others
- Pay off and close installment loans
- Ignore collection accounts
Rapid Rescoring
Rapid rescoring is a process that allows quick updates to credit reports during a mortgage application.
How It Works
- Borrower takes specific action (pays down card, corrects error)
- Lender requests updated report from credit bureaus
- Score is recalculated with new information
- Process takes 3-5 business days vs. 30+ normally
Common Rapid Rescore Scenarios
| Scenario | Potential Score Increase |
|---|---|
| Pay credit card to 30% utilization | 20-50 points |
| Remove erroneous collection | 50-100+ points |
| Add authorized user tradeline | 20-40 points |
| Correct payment history error | Varies widely |
Key Takeaways
- FICO scores range from 300-850 with payment history (35%) as the most important factor
- Mortgage lenders use the middle score of three bureau scores
- Credit utilization should ideally be below 30% of available credit
- Major derogatory marks include bankruptcies, foreclosures, collections, and charge-offs
- Hard inquiries within 45 days for mortgage shopping count as one inquiry
- Waiting periods after bankruptcy/foreclosure vary by loan program
- Rapid rescoring can quickly update scores during the loan process
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Test Your Knowledge
A mortgage applicant has the following credit scores: Experian 695, Equifax 720, TransUnion 710. Which score will the lender use for underwriting?
A
B
C
D
Test Your Knowledge
Which factor has the greatest impact on a FICO credit score?
A
B
C
D
Test Your Knowledge
A borrower with a Chapter 7 bankruptcy wants to obtain an FHA loan. How long must they wait after discharge?
A
B
C
D