| | WHAT IS A FICO SCORE?
Order a Copy of Your Credit Report
In the recent past credit scoring had little or nothing to do with mortgage lending. When reviewing your credit an underwriter would make a subjective decision based on past payment history and take into account explanations on past credit problems. Things have changed. Lenders studied the relationship between credit scores and mortgage delinquencies and found a definite relationship. FICO stands for Fair Isaac & Company and is the name for the most well known credit scoring system which is used to estimate credit worthiness. Each of the three bureaus (Experian, Trans Union, Equifax) uses its own scoring system, so you’ll have 3 different scores. The higher your score the lower your risk of default. Scores will range between 450 to 800, however some scores may fall outside this range. Basic guidelines on how to view the FICO scores vary little from lender to lender. Usually, a score above 680 will require a very basic review of the entire loan package. Scores between 640 and 680 require more thorough underwriting. Once a score gets below 640, an underwriter will look at a loan application with a more cautious approach. Many lenders will not even consider a loan with a FICO score below 620. Borrowers with FICO scores of 620 and above will get the best interest rates. 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.
What kind of score do I need for a home loan?
Most lenders will take the average of all 3 scores to evaluate an application. Low doc, no doc or low down payment loans will have higher FICO requirements. What factors determine my score? 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. Public records, such as tax liens, judgments, or bankruptcies have an impact. A short credit history is also a negative. Myth - paying off debts 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! Too few revolving accounts or no recent credit card balances may negatively impact your score as well.
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. 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.
FICO scores and interest rates
Credit scores can affect more than whether your loan gets approved or not. They can also affect how much you pay for your loan, too. Some lenders establish a "base price" and will reduce the points on a loan if the credit score is above a certain level. For example, one major national lender reduces the cost of a loan by a quarter point if the FICO score is greater than 725. If it is between 700 and 724, they will reduce the cost by one-eighth of a point. A point is equal to one percent of the loan amount. There are other lenders who do it in reverse. They establish their base price, but instead of reducing the cost for good FICO scores, they "add on" costs for lower FICO scores. The results from either method would work out to be approximately the same interest rate. It is just that the second way "looks" better when you are quoting interest rates on a rate sheet or in an advertisement. FICO Scores and Mortgage Underwriting Decisions FICO scores as guidelines
FICO scores are only "guidelines" and factors other than FICO scores affect underwriting decisions. Some examples of compensating factors that will make an underwriter more lenient toward lower FICO scores can be a larger down payment, low debt-to-income ratios, an excellent history of saving money, and others. There also may be a reasonable explanation for items on the credit history which negatively impact your credit score. They don't always make sense
Even so, sometimes credit scores do not seem to make any sense at all. One borrower with a completely flawless credit history had a FICO score below 600. One borrower with a foreclosure on her credit report had a FICO above 780. Portfolio & sub-prime lenders
Finally, there are a few "portfolio" lenders who do not even look at credit scoring, at least on their portfolio loans. A portfolio lender is usually a savings & loan institution who originates some adjustable rate mortgages that they intend to keep in their own portfolio instead of selling them in the secondary mortgage market. They may look at home loans differently. Some concentrate on the value of the home. Some may concentrate more on the savings history of the borrower. There are also "sub-prime" lenders, or "b & c paper" lenders, who will provide a home loan, but at a higher interest rate and cost. Running credit reports
One thing to remember when you are shopping for a home loan is that you should not let numerous mortgage lenders run credit reports on you. Wait until you have a reasonable expectation that they are the lender you are going to use to obtain your home loan. Not only will you have to explain any credit inquiries in the last ninety days, but numerous inquiries will lower your FICO score by a small amount. This may not matter if your FICO is 780, but it would matter to you if it is 642. Don't buy a car just before looking for a home!
In conclusion, a word of advice not directly related to FICO scores. When people begin to think about the possibility of buying a home, they often think about buying other big ticket items, such as cars. Quite often when someone asks a lender to pre-qualify them for a home loan there is a brand new car payment on the credit report. Often, they would have qualified in their anticipated price range except that the new car payment has raised their debt-to-income ratio, lowering their maximum purchase price. Sometimes they have bought the car so recently that the new loan doesn’t even show up on the credit report yet, but with six to eight credit inquiries from car dealers and automobile finance companies it is kind of obvious. Almost every time you sit down in a car dealership, it generates two inquiries into your credit. Credit history is important
Nowadays, credit scores are important if you want to get the best interest rate available. Protect your FICO score. Do not open new revolving accounts needlessly. Do not fill out credit applications needlessly. Do not keep your credit cards nearly maxed out. Make sure you do use your credit occasionally. Always make sure every creditor has their payment in their office no later than 29 days past due. And never ever be more than thirty days late on your mortgage. | |
