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 creditworthiness. Each of the three bureaus (Experian, Trans Union, Equifax) employs its scoring system, so a person will usually have three 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 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 loan programs available. Most lenders will take the average of all three scores to evaluate an application. Niche loans, such as Easy Qualifier and low down payments, will have higher FICO® requirements.
How is My Score Determined?
The FICO® model has five main elements:
- Past payment history (about 35% of score) The fewer the late payments, the better. Recent late payments will have a much more significant impact than a very old Bankruptcy with perfect credit.
Myth - paying off cards with recent late payments will fix things. Payoffs do not affect payment history.
- 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!
- Length of credit history (15% of score) The longer open accounts, the better the score. Opening new and seasoned closing accounts can significantly bring down a score.
- Types of credit used (10% of score) Finance company accounts score lower than bank or department store accounts.
- Inquiries (10% of score) Multiple inquiries can be a risk if several cards are applied for or other accounts are maxed out. Multiple mortgages or car inquiries within 14 days are counted as one inquiry.
How Can I Raise My Score
The way can only change your score 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 of the exact impact a change will have on your score.
What Does This Mean to Me?
It would help if you had your credit reviewed BEFORE you looked for a home and worked with a PROFESSIONAL loan officer to ensure your loan is based on the most accurate information.