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When
you apply for a mortgage loan, you expect your lender to pull a credit report
and look at whether you've made your payments on time. What you may not expect
is that they seem to be more interested in your "FICO" score.
"What's a FICO score?" is a common reaction.
Each time your credit report is pulled, it is run through a computer program
with a built-in scorecard. Points are awarded or deducted based on certain
items such as how long you have had credit cards, whether you make your
payments on time, if your credit balances are near maximum, and assorted other
variables. When the credit report prints in your lender's office, the total
score is displayed. Your score can be anywhere between the high 300's and the
low 800's.
Lenders wanted to determine if there was any relationship between these credit
scores and whether borrowers made their payments on time, so they did a study.
The study showed that borrowers with scores above 680 almost always made their
payments on time. Borrowers with scores below 600 seemed fairly certain to
develop problems.
As a result, credit scoring became a more important factor in approving
mortgage loans. Credit scores also made it easier to develop artificial
intelligence computer programs that could make a "yes" decision for
loans that should obviously be approved. Nowadays, a computer and not a person
may have actually approved your mortgage.
In short, lower credit scores require a more thorough review than higher
scores. Often, mortgage lenders will not even consider a score below 600.
Some of the things that affect your FICO score are:
- Delinquencies
- Too many accounts opened within the last twelve months
- Short credit history
- Balances on revolving credit are near the maximum
limits
- Public records, such as tax liens, judgments, or
bankruptcies
- No recent credit card balances
- Too many recent credit inquiries
- Too few revolving accounts
- Too many revolving accounts
FICO actually stands for Fair Isaac and Company, which is the company used by
the Experian (formerly TRW) credit bureau to calculate credit scores.
Trans-Union and Equifax are two other credit bureaus who also provide credit
scores.
WHAT'S A
FICO?
What is a FICO Score?
FICO stands for Fair Isaac & Company and is the name for the most well
known credit scoring system, used by Experian. The credit bureau's computer
evaluates a complete credit profile and assigns a score, which is used to
estimate credit worthiness. Each of the three bureaus (Experian, Trans Union,
Equifax) employs its own scoring system, so a given person will usually have 3
separate scores. Someone with a higher score will be viewed as a better risk
than someone with a lower score. Typically, scores will range from about 600 to
700 or above, although some cases will be outside this range.
What Kind of Score Do I Need for a Home Loan?
There are as many answers to this question as there are loan programs
available. Most lenders will take the average of all 3 scores to evaluate an
application. "Niche" loans, such as Easy Qualifier and low down
payment loans will have the higher FICO requirements.
How is My Score Determined?
The FICO model has 5 main elements:
1) Past payment history (about 35% of score) The fewer the late payments
the better. Recent late payments will have a much greater impact than a very
old Bankruptcy with perfect credit since.
Myth - paying off cards with recent late payments will fix things.
Payoffs do not affect payment history.
2) Credit use (about 30% of score) Low balances across several cards is
better than the same balance concentrated on a few cards used closer to
maximums. Too many cards can bring down the score, but closing accounts can
often do more harm than good if the entire profile is not considered. BE
CAREFUL WHEN CLOSING ACCOUNTS!
3) Length of credit history (15% of score) The longer accounts have been
open the better for the score. Opening new accounts and closing seasoned
accounts can bring down a score a great deal.
4) Types of credit used (10% of score) Finance company accounts score
lower than bank or department store accounts.
5) Inquiries (10% of score) Multiple inquiries can be a risk if several
cards are applied for or other accounts are close to maxed out. Multiple
mortgage or car inquiries within a 14 day period are counted as one inquiry.
How Can I Raise My Score
Your score can only be changed by the way that item is reported directly to the
credit bureaus (Experian, TU, Equifax). Written confirmation from the creditor
is required. It is best to make these corrections before you try to purchase a
home, because you can never be sure the exact impact a change will have on your
score.
What Does This Mean to Me?
You should have your credit reviewed BEFORE you look for a home, and work with
a PROFESSIONAL loan officer to make sure your loan is based on the most
accurate information.
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