What is a FICO® Score?
A FICO score is a three-digit number that lenders and creditors use to determine if they should approve your loan or credit you apply for. The credit bureau’s evaluates your complete credit profile and assigns a score, which is used to estimate credit worthiness. Each of the three bureaus (Experian, Trans Union, Equifax) employs its own scoring system, so a given person will usually have 3 separate and different scores.
What Kind of Score Do I Need for a Home Loan?
That would really depend on the type of loan you apply for. Most lenders will take the average of all 3 scores to evaluate an application. For a mortgage loan, the highest score is usually eliminated, the lowest score is usually eliminated, which leaves the middle score. Keep in mind, certain loans will have higher FICO® requirement than others. its always a good idea to speak with your loan officer to address your concerns.
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 affect 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 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) 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. 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 (Experian, TU, Equifax). 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.
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. I hope this information was helpful.