The mortgage process can be really nerve racking – especially if you run into a problem with your FICO score being too low. That is why we are breaking down the FICO score here so that you understand how it impacts your ability to qualify for a home loan.
The FICO score is actually the brand name for the most widely used credit worthiness rating. A credit score is a numerical representation of a person’s credit worthiness and it helps lenders determine the likelihood of a person paying his or her debts. The FICO score began in 1989 and it is the number used by the majority of banks and lenders. It is also the model used by all three major credit reporting bureaus: Experian, Equifax, and Transunion. It is important to note that because each credit reporting agency determines the FICO score differently your FICO score could be different depending on the company, according to Kevin O’Neil, loan officer with Advance Financial Group. This is why in the mortgage loan process the loan officer will pull all three major credit bureau reports and look at the middle FICO score in determining the loan product you’ll qualify for.
What Determines a Credit Score?
Again, each credit agency uses a different calculation but these are a good estimate of the weight of each category.
Payment History: 35%
The single best thing you can do to increase your credit score is make sure you have a long history of paying your debts on time, according to Bill Weakley of Advance Financial Group. You need at minimum 12 months of history for the credit line to help build the best FICO score possible. The payments need to be on time. Also, the longer a debt is on your report the less likely it is to affect your total score – so having a good 6-12 month period of paying debts and bills on time can really contribute to your FICO score growth.
Amounts Owned: 30%
Want to know the one thing that every loan officer we interviewed told us about FICO scores? Make sure to keep all your open lines of credit below 50% of your gross household income – and even better under 25%.
Length of Credit History: 15%
Having open lines of credit for a long period of time is a good indicator that you can handle debt. These accounts help raise FICO scores. This also helps the Payment History and Amount Owned stats because the more open your credit lines are, the higher your score.
New Credit: 10%
Opening several lines of credit at the same time will hurt your credit score. According to Sandy Johnson, loan officer from Advance Financial Group, your FICO score will take a small hit when you open new credit. Sometimes you want to transfer a balance on a credit card to one with a lower interest rate, which can help with debt-to-income ratios. The key is to keep the old card open – don’t close it and don’t charge anything on it.
Types of Credit Used: 10%
If you have judgments you must clear them up – this was another across the board tip from the loan officers from Advance Financial Group. Judgements attach to real property and have a court records involved, they simply do not go away. You need to clear them up. According to Weakley, it is also a good idea to have a few various lines of credit open – one or two credit cards, a car payment, and even a mortgage. It shows a history of you paying and handling debt.
Credit Score Ranges
Most credit score ranges are from 300 to 900, and the majority of people in the United States are somewhere between 600-800 range. For the majority of loan products offered by banks you will need a minimum of 640. “You should think about the credit score as your invitation to the buffet. The larger the score the more choices and offerings you have on the buffet – when that score lowers it also lowers your choices in programs,” said Weakley.
Home buyers want to shoot for a FICO score of 720 or higher to start being offered the best loan rates and programs. What a lot of consumers do not know is that a good loan officer can help create a plan to build the score.
“We have a ‘What If Scenario.’ We can build a plan around to help the client move the score higher,” said Johnson. “We put in items and steps for the client to follow and then the client has an action step towards getting a better score and a better loan product. This is a great thing for REALTORS® to use to help buyers who may not be qualified for a mortgage – the agent can come and set up a meeting with me and their clients. We create the plan and the client can become a stronger buyer.”
The ‘What If Scenario’ can give a score improvement estimate based on certain things the home buyer does. This allows the home buyer to prioritize items that will make the most impact on their score, increasing their chances of qualifying for a home mortgage.