So you've decided you want to buy a home and have already toured several Albany homes for sale, but did you know your FICO score can make a big difference? Assessing your FICO score can help you determine if it's high enough to qualify for a mortgage loan on terms you can afford. If you're planning to make this major purchase, read on to understand why your FICO score is important and the steps you can take to improve it.
- What is a FICO Score?
Created by the Fair Isaac Corporation, the FICO score is a three-digit number used by lenders to assess an applicant's creditworthiness. A FICO score ranges from 300 to 850, is largely based on the information in your credit reports, and can help lenders assess how likely you're to repay debt. This, in turn, can affect how much you can borrow, how much it will cost, and how many months you have to repay. FICO scores are used by more than 90% of lending companies, but not all credit scores are FICO scores. In fact, FICO releases new credit score versions to improve on the last one and create a more reliable and predictive score for lenders. This means that you can have several FICO scores, based on the model used by the mortgage company.
- Why Your FICO Score is Important
Your credit score is an important factor in your financial life. Your mortgage lender will consider your financial situation in its entirety, including your FICO score from one or more of the credit bureaus. The goal is to reduce the risk incurred to ensure that you can afford the terms and repay the loan. The score has a huge impact on the interest rate and the resulting payments. The higher your score, the more likely you'll be able to qualify for a mortgage loan. A lender may extend lower rates and the most favorable terms if you present less of a risk for them.
- FICO's Credit Score Formula
FICO scores range from 300 to 850, with a higher score indicating higher odds of repayment and lower risk to the lender. Here's a look at the FICO score ranges:
- Excellent credit: 800 to 850
- Very good credit: 740 to 799
- Good credit: 670 to 739
- Fair credit: 580 to 669
- Poor credit: 300 to 579
Every lender determines for themselves what an ideal FICO score is and how they'll use the score for the loan approval process. Nevertheless, FICO scores are calculated using different pieces of data in your credit report. Your payment history accounts for 35% of your total score, credit utilization (amounts owed) for 30%, the length of your credit history for 15%, type of credit in use (your credit mix) for 10%, and new credit applications account for 10% of your score.
- How to Improve Your FICO scores
Buying a home with a poor FICO score is possible with a large enough down payment, stable employment history, and low outstanding debt. But the difference between a less-than-stellar credit score and an excellent one can mean paying over $100,000 more in interest over the duration of your mortgage. That's too much to lose just because you didn't work on improving your credit score. There are a number of things you can do to get your FICO score moving in the right direction. Be patient, though, building a strong credit history takes a bit of effort, time, and discipline.
- Review your credit reports to see what's hurting or helping your score. Be sure to check for erroneous information.
- Pay your bills on time.
- Keep your total outstanding balance at 30% or less of your total credit limit.
- Don't close unused credit cards to raise your scores or open new accounts to have a better credit mix.
- Take care of unpaid credit accounts sent to collections.
Our real estate agents are here to help you navigate every aspect of buying a home, from improving your FICO score to finding the right home to call your own. Contact us to get started.