In skin, multipotent stem cells generate the keratinocytes of the epidermis, sebaceous gland, and hair follicles. In this paper, we show that Tcf3 and Lef1 control these differentiation lineages. In contrast to Lef1, which requires Wnt signaling and stabilized β-catenin to express the hair-specific keratin genes and control hair differentiation, Tcf3 can act independently of its β-catenin interacting domain to suppress features of epidermal terminal differentiation, in which Tcf3 is normally shut off, and promote features of the follicle outer root sheath (ORS) and multipotent stem cells (bulge), the compartments which naturally express Tcf3. These aspects of Tcf3's action are dependent on its DNA binding and Groucho repressor-binding domains. In the absence of its β-catenin interacting domain, Lef1's behavior (ΔNLef1) seems to be markedly distinct from that of ΔNTcf3. ΔNLef1 does not suppress epidermal differentiation and promote ORS/bulge differentiation, but rather suppresses hair differentiation and gives rise to sebocyte differentiation. Taken together, these findings provide powerful evidence that the status of Tcf3/Lef complexes has a key role in controlling cell fate lineages in multipotent skin stem cells.