Your FICO Score and How It Impacts Your Mortgage
When it comes to home buying, we talk a lot about credit scores and what it takes to qualify for a mortgage. You’ve probably heard credit scores being referred to as a FICO score – but what does that mean, exactly? And what does it entail? Below, we’ll share the important details you should know about your credit score and how it affects getting a mortgage loan.
Defining a FICO score
FICO is short for Fair Isaac Corporation, which is an independently operated company that aggregates all the details of your credit history and calculates a number that reflects your creditworthiness.
It’s essentially known as predictive analysis, and lenders will use the information to predict consumer behavior related to paying bills in a timely manner or handling large amounts of credit responsibly.
How FICO scores are calculated
Now that you know what a FICO score is, you may be wondering what factors go into this number. Since much of your creditworthiness hinges upon this number, understanding these components is key to ensuring your credit score is in tip-top shape. Here’s how it breaks down:
Payment history (35%) – This shows whether you’ve made your payments on time
Outstanding balances (30%) – This shows how much you owe versus how much available credit you have
Age of credit history (15%) – The longer your accounts are open, the better
New credit lines and inquiries (10%) – Going on a credit application spree in a short amount of time can represent a risk and lower your score
Types of credit/account diversity (10%) – Having a mix of credit cards, auto loans, student loans and mortgages is better than just having one type
It’s worth noting that the percentages above can vary depending on your individual credit background. For example, if you’re a new borrower, you probably won’t have an extensive credit history – but that’s okay because in many cases, FICO will adjust the other items and redistribute the percentages accordingly.
A good FICO score for obtaining a mortgage
How do you know if you have a “good” FICO score when it comes to applying for a mortgage? Generally, the scores range from 300 to 850, and are rated as follows:
800 and above: This is considered to be an excellent range and you’ll likely be able to qualify for a mortgage with a great interest rate and terms.
740-799: This is considered to be a very good range – you’ll likely be approved for a mortgage and may even qualify for a good interest rate.
670-739: This is considered to be a good range – you’ll likely be considered a low risk when applying for a mortgage.
580-669: This is considered a fair range, which means it may be possible for you to get a mortgage, but your interest rate and terms may not be ideal. This could lead to a larger monthly mortgage payment than anticipated, since you might face higher interest rates.
Lower than 580: This is considered to be a poor range, and you’ll likely find it hard to obtain a mortgage. However, a mortgage banker can work with you to improve your scores to help you qualify for a mortgage.
Your mortgage lender will likely use a more strict formula when determining your credit score, since their ultimate concern is the likelihood to pay your mortgage (and not your credit card or auto loan). Lenders usually review the information provided by three credit reporting agencies – Equifax, Experian and TransUnion – and each may provide slight variations in your score.
Improving your FICO score
Like most things in life, there’s usually room to improve your financial and credit history in some aspect. If you’re hoping to buy a house, getting your finances in tip-top shape is key to being approved for a mortgage on the perfect home.
There are certain areas that are weighed more heavily than others when it comes to impacting your credit, including missed payments, negative marks on your credit report (like bankruptcy or collections), maxing out credit cards, age of accounts and hard credit inquiries.
With those in mind, here are a few suggestions to help you improve your credit score in order to obtain a mortgage:
Review your credit report carefully and make sure the information is accurate. Also, determine which areas need work to improve your credit score.
Become and stay current on any missed payments so your score can begin to increase.
Keep your credit balances as low as possible to maintain a low credit ratio and low debt-to-income ratio.
Avoid opening too many credit accounts too fast.
Don’t close unused credit cards and plan to keep your oldest line of credit open to maintain a longer credit history.
Maintain a mix of credit types, such as credit cards, auto loans, personal loans, student loans and a mortgage.
It’s easy to get caught up in the experience of searching for a new home and rushing into the mortgage application process. However, it’s important to remember that your credit history and FICO score are significant factors when it comes to mortgage approval and getting a favorable interest rate. If you think you need to improve your credit, your mortgage banker can help you determine the best path of action to get you on the fast track toward buying a home.