How Do Lenders Decide Your FICO and Credit Scores?
A credit score is a numerical representation of an individual's creditworthiness. It reflects the likelihood that a person will be able to repay their debts on time. A FICO score is a specific type of credit score developed by the Fair Isaac Corporation (FICO). It is widely used by lenders to assess an individual's creditworthiness and is based on data from the individual's credit reports.
How Does FICO Impact Home Buyers?
When it comes to buying a home, a person's credit score and FICO score can have a significant impact on their ability to secure a mortgage and the terms of that mortgage.
Lenders use credit scores and FICO scores to assess the risk of lending to a particular borrower. The higher a person's credit score and FICO score, the more likely they are to be approved for a mortgage and the more favorable the terms of that mortgage will be. On the other hand, a lower credit score or FICO score may result in a mortgage being denied or may result in less favorable terms, such as a higher interest rate.
The 700 Club and Above
In general, a credit score of 700 or above is considered good and may qualify a person for a mortgage with more favorable terms. However, it is important to note that credit scores and FICO scores are just one factor that lenders consider when evaluating a mortgage application.
Other factors may include the borrowers:
income,
employment history,
and debt-to-income ratio.
There are five main factors that go into calculating a FICO score:
Payment history: This accounts for 35% of the FICO score and is the most important factor. It reflects an individual's track record of making timely payments on their debts and bills. Late or missed payments, as well as bankruptcy, can have a negative impact on this factor.
Credit utilization: This accounts for 30% of the FICO score and measures how much of an individual's available credit they are using. Using a high percentage of available credit can be seen as a sign of financial stress and can lower the FICO score.
Length of credit history: This accounts for 10% of the FICO score and reflects how long an individual has had credit accounts. A longer credit history may be seen as more stable and can lead to a higher FICO score.
Credit mix: This accounts for 15% of the FICO score and refers to the different types of credit an individual has, such as credit cards, mortgages, and car loans. A diverse mix of credit can be seen as a positive and can lead to a higher FICO score.
New credit: This accounts for 10% of the FICO score and reflects how many new credit accounts an individual has recently opened. Opening too many new credit accounts in a short period of time can be seen as a risk and can lower the FICO score.
In addition to these five factors, the FICO score also takes into account other information from an individual's credit report:
such as the types of credit accounts they have,
the balances on their accounts,
and the age of their accounts.
Steps To Improve Your FICO Score Before Applying for A Mortgage
There are a few steps that home buyers can take to improve their credit score and FICO score before applying for a mortgage:
Check their credit report and credit score: It is important for home buyers to know their credit score and to check their credit report for any errors or inaccuracies. Credit reports can be obtained for free from the three major credit bureaus: Equifax, Experian, and TransUnion.
Pay bills on time: Payment history is a major factor in credit scores and FICO scores. Home buyers should make sure to pay all their bills on time, including credit card bills, student loan payments, and any other debts.
Reduce credit card balances: Credit utilization, or the amount of credit being used relative to the credit limit, is also a factor in credit scores and FICO scores. Home buyers should try to keep their credit card balances as low as possible, ideally less than 30% of their credit limit.
Avoid applying for new credit: Every time a person applies for credit, it can have a negative impact on their credit score and FICO score. Home buyers should try to avoid applying for new credit, such as credit cards or car loans, before applying for a mortgage.
In summary, a person's credit score and FICO score can have a significant impact on their ability to secure a mortgage and the terms of that mortgage. Home buyers should make sure to check their credit score and credit report, pay bills on time, reduce credit card balances, and avoid applying for new credit to improve their creditworthiness and increase their chances of securing a mortgage with more favorable terms.
Want to check your FICO score? It's a smart start to your home shopping adventure. Let's talk!
Comments