How does the lender decide which FICO score to use when processing a borrowers mortgage loan application? This is a common question about FHA mortgage loans, and its not surprising why there is confusion in this area. After all, many borrowers will have three FICO scores, reported from the three major credit reporting agencies. Which of the three will the lender use?
FHA loan rules governing this are found in HUD 4000.1 starting on page 127. This section begins by describing what the FHA loan rulebook calls the Minimum Decision Credit Score. According to HUD 4000.1: The Minimum Decision Credit Score (MDCS) refers to the credit score reported on the Borrowers credit report when all reported scores are the same.
That doesn't help clear things up for the borrower confused about how the lender selects the credit score to be used for approving the loan when the three scores are NOT the same. Page 127 says in these cases the lender wont look at the highest or the lowest score:
Where three differing scores are reported, the middle score is the MDCS. And in cases where there are three scores, but only two differ, the MDCS is the lowest score. Where only one score is reported, that score is the MDCS.
Who has their credit scores reviewed for the FHA home loan according to HUD 4000.1? Any borrower financially obligated on the mortgage. An MDCS is determined for each Borrower. Where the Mortgage involves multiple Borrowers, the Mortgagee must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers.
What about in cases where there are multiple borrowers but not all of them have a credit score? HUD 4000.1 also anticipates this issue, stating, Where the Mortgage involves multiple Borrowers and one or more of the Borrowers do not have a credit score (non-traditional or insufficient credit), the Mortgagee must select the lowest MDCS of the Borrower(s) with credit score(s).
It is easy to become fixated on the FICO score issue, which is definitely important but not the only criteria the lender will use to approve the loan. If your FICO scores are good but your debt to income ratio is higher than normal, for example, that is an issue the lender may need to discuss with you. Borrowers who not only have high FICO scores but also a good history of on-time payments and an reasonable debt-to-income ratio will have a better chance of loan approval.
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