FICO stands for Fair Isaac & Company and is the name for the most well-known credit scoring
system, which is used by Equifax, one of the nation's largest repositories for
consumer credit information. The scoring system uses a computer algorithm to
evaluate a consumer's credit profile and assign it a score. The score is
touted as a reflection of a consumer's credit worthiness, or apparent risk to
a lender.
Each of the three major credit bureaus (Experian, TransUnion and Equifax) employs its own scoring system, so a given person
may have credit scores other than a FICO score. Some lenders and loan brokers
mistakenly use the term FICO to refer to credit scores generally. In any case,
persons with higher scores are viewed as better risks than persons with lower
scores.
Acceptable scores for getting a mortgage with a competitive interest rate
typically range from about 660 to 800 and above. Mortgage loans may still be
available to people with scores in the lower 600s, but these sub-prime
loans often carry much higher rates of interest.
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 take the average of all 3 scores to evaluate an application. "Niche" loans, such as Easy Qualifier and low down payment loans will have higher FICO requirements.
How is My Score Determined?
The FICO model has five main elements:
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.
Myth - paying off cards 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.
3) Length of credit history (15% of score). The longer that 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) Credit inquiries (10% of score). Multiple inquiries can be a risk if several applications are made or other accounts are close to their allowed maximums. 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 your credit information is recorded by the credit bureaus. They are legally required to remove erroneous information, but getting them to do so may be a long and arduous task. Written confirmation from the creditor is usually required, but you can add a statement to your credit history in the event of a dispute or fraud.
What Does This Mean to Me?
It is best to discover any errors and make needed corrections before you try to purchase a home. You can never be sure the exact impact an error may have on your score, and a seller may not be willing to wait around for you to get your credit report corrected so that you can get your loan.
You should have your credit reviewed BEFORE you look for a home, and work with an experienced loan professional to make sure your loan qualification is based on the most accurate information.
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