Your FICO Score
Named for the San Rafael-based Fair, Isaac and Co., a FICO is a numerical score of credit-worthiness assigned to anyone who has applied for consumer credit.
Until a few years ago, FICO scores had little to do with mortgage lending. Underwriters made decisions based on payment history and income-to-debt ratios. But they began to look at the relationship between credit scores and mortgage delinquencies. People with low FICO scores defaulted on loans with far greater frequency than did their higher scoring peers.
Your FICO scores may differ slightly between the three national credit bureaus, Equifax, Experian, and Trans Union. In general, however, each agency uses the following issues to determine your score.
1. Delinquencies. A 30-day late payment is not as risky as a 90-day late payment. Still, it’s best to avoid either.
2. New credit. Creditors expect you to open accounts in order to establish credit, but you run the risk of reducing your score by opening several credit accounts in a short period of time. It suggests you are overextended and may not be able to meet new credit obligations.
3. Short credit history. A longer credit history is more impressive than a newly established one.
4. Balances on revolving accounts near maximum limits. A consumer close to “maxing out” cards may have trouble making payments in the future.
5. Public records (tax liens, judgments, bankruptcies). These all jeopardize a healthy FICO score.
6. Consumer credit agencies. Although they offer consumers lower interest rates and credit counseling, the use of credit counseling services negatively affects FICO scores.
7. No recent credit card balances. Having a very small balance without late payments can improve your FICO, showing that you manage credit responsibly.
8. Too few revolving accounts. If you fail to use credit, there is no way to evaluate your ability to manage it.
9. Too many revolving accounts. Multiple revolving accounts suggest a high risk of over-extension.
Credit scores can affect your interest rate. Some lenders establish lower interest for high FICO scores and higher interest for low scores. Some will not loan at all to people with low FICOs. And other lenders specialize in finding loans for the FICO-score challenged. If you have less than perfect credit, keep looking until you find a lender who will work with you.
Understanding FICO Scores: Why They Matter in Home Buying
Your FICO score plays a crucial role in your ability to buy a home, affecting everything from mortgage approval to interest rates. Whether you're a first-time homebuyer or looking to refinance, understanding how your credit score works can help you secure the best loan terms.
What is a FICO Score?
A FICO score is a three-digit number (ranging from 300 to 850) used by lenders to assess your creditworthiness. It’s based on your credit history and determines how likely you are to repay borrowed money.
How is Your FICO Score Calculated?
Your score is calculated using five key factors:
✅ Payment History (35%) – Do you pay your bills on time? Late or missed payments can lower your score.
✅ Amounts Owed (30%) – High balances or maxed-out credit cards can negatively impact your score.
✅ Length of Credit History (15%) – A longer credit history shows stability and can boost your score.
✅ New Credit Inquiries (10%) – Applying for multiple new accounts in a short time can lower your score.
✅ Credit Mix (10%) – Having a mix of credit types (credit cards, auto loans, mortgages) can improve your score.
What is a Good FICO Score for Home Buying?
While mortgage lenders have different requirements, here’s a general breakdown of what your FICO score means for home loans:
800 – 850 (Excellent): Qualifies for the best mortgage rates and loan terms.
740 – 799 (Very Good): Still great rates, with only slightly higher costs.
670 – 739 (Good): Approved for most loans, but interest rates may be higher.
580 – 669 (Fair): You may qualify for FHA loans, but with higher costs.
Below 580 (Poor): Limited mortgage options, may require a higher down payment.
How to Improve Your FICO Score Before Buying a Home
If your score needs a boost before you apply for a mortgage, here are some tips:
✅ Pay Bills on Time: Set up autopay or reminders to never miss a payment.
✅ Reduce Credit Card Balances: Keep balances below 30% of your credit limit.
✅ Avoid Opening New Accounts: Each hard inquiry can temporarily lower your score.
✅ Check Your Credit Report: Look for errors and dispute any inaccuracies.
✅ Keep Old Accounts Open: Closing old accounts can shorten your credit history.
Final Thoughts
Your FICO score is one of the most important factors in getting a mortgage. A higher score means better loan options, lower interest rates, and reduced long-term costs. If you're planning to buy a home in the near future, taking steps to improve your credit can make a big difference.
Need help navigating the home-buying process? Contact us today for expert advice on financing, mortgages, and finding your dream home!