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. I always suggest to my buyers that they begin preparing for qualification and pre-approval from a lender six months before their house search begins. Some buyers ask, "Can't I just jump right into the market?" And of course you can, but understand that lenders base your interest rate largely on your FICO score. That half point of interest could end up costing you tens of thousands of dollars over the 30 year life of the loan.
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. Here in Northern Colorado, I have had clients work with a number of lenders on FHA loans, Metro DPA loans (down payment assistance), VA loans, conventional loans, and land and farm loans. I can point you in the right direction, and get you connected with a lender that will honor you and your time.
Reach out to me today with your mortgage financing questions, or for suggestions on whom to speak with in depth. Thank you.
James Sack, REALTOR®
Coldwell Banker Residential Brokerage
1109 Oak Park Drive | Fort Collins, CO 80525
C: (970) 217-9705 | O: (970) 223-6500 | E: James.Sack@coloradohomes.com | W: www.JamesSack.com
Cover photo courtesy of Pixabay's Karsten Bergmann