What Is a FICO® Score?
FICO® stands for Fair Isaac Corporation and is the name for the most well-known credit scoring system, used by all three major credit bureaus (Experian, TransUnion, and Equifax). The bureaus' computers evaluate your complete credit profile and assign a score to estimate creditworthiness. Because each bureau may have slightly different information on file, a given 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. FICO® scores range from 300 to 850, with a score of 670 or above generally considered good.
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 pull a tri-merge credit report and use the middle score of all three to evaluate an application (or the lowest middle score if applying jointly). Conventional loans typically require a minimum score of 620, while government-backed options like FHA loans may accept lower scores. Conversely, niche loans, jumbo loans, and low down payment loans usually have higher FICO® requirements.
How Is My Score Determined?
The FICO® model has 5 main elements:
- 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 erase accurate 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 their 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 accounts have been open the better for the score. Opening new accounts and closing seasoned accounts can bring down a score a great deal.
- Types of credit used (10% of score): A healthy mix of credit types is beneficial. 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 close to maxed out. However, multiple mortgage or car inquiries within a 14- to 45-day period are typically counted as one inquiry to allow for rate shopping.
How Can I Raise My Score?
Your score is based entirely on the information reported to the credit bureaus. If there are errors, they must be corrected directly with the bureaus (Experian, TransUnion, Equifax), and written confirmation from the creditor may be required. It is best to make these corrections before you try to purchase a home, because you can never be absolutely sure of the exact impact a change will have on your score and it takes time for updates to reflect.
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.
