Understanding Your FICO Score - Frederick Real Estate Online (2024)

In today’s environment of tighter lending standards, it’s more important than ever to handle money and credit intelligently and carefully. Although credit scores are not the only determining factor in deciding the credit-worthiness of a borrower, they are an important part of the process. Understanding your FICO score is and important part of managing your credit.

Good credit scores can mean a lower interest rate, which can save you money on your monthly mortgage. Having a good score also gives you many more options in loan products when you start the home buying process.

As well as mortgages, having a good credit score benefits you and several other ways:

• AutoFinancing is better
• Renting is easier
• Job Prospects… yes, potential employers can check your credit score
• Obtaining other Loans
• Major purchases, like appliances or furniture

What is a FICO Score?

A credit score, simply put, asks and answers the basic question of whether or not a borrower pays their bills. It helps lenders determine if a borrower is likely to pose any type of credit risk.

A FICO® score [FICO® – Fair Issac Corporation] is a summary of an individual’s credit history from the three main credit bureaus: Equifax, Experian and TransUnion. Each bureau collects data differently, so an average of all three is considered a fair assessment of credit-worthiness.FICO^® Scores are calculated based solely on information in consumer credit reports maintained at the credit reporting agencies.

There are other credit-reporting companies, but FICO® is the most widely used, as 90% of top lenders use FICO^® Scores to determine whether an individual is a good credit risk.

Understanding Your FICO Score

In the US FICO® scores range from 300 to 850. The average score is around 660 to 670, and is considered good credit. 749 and up qualifies as excellent credit and scores below 620 are seen as less-than good credit.

The minimum credit score required for an FHA mortgage is typically 580. However, some lenders may require a higher score, such as 620 or above, to qualify for an FHA loan. It’s important to note that credit score requirements can vary among lenders, so it’s best to check with specific lenders to determine their requirements.

What Makes Up a Credit Score?

A FICO score is made up of several factors, including payment history, credit utilization, length of credit history, types of credit used, and new credit applications. These factors are used to calculate an individual’s creditworthiness and determine their FICO score.

The specific percentages of each element that make up a FICO score are not publicly disclosed by the Fair Isaac Corporation. However, it is generally known that payment history and credit utilization have the most significant impact on a person’s credit score. Length of credit history, types of credit used, and new credit applications also play a role, but to a lesser extent.

Typically, most credit specialists use this breakdown of the five factors:

• 35%: Payment History, including on time pays and delinquencies; more weight is placed on recent (24 months) payment history.
• 30%: Remaining debt capacity
• 15%: Length of credit history
• 10%: Accumulation of debt in last 12 to 18 months; number of inquiries; opening dates
• 10%: Mix of Credit:
  — Installment, revolving and open accounts
  — Number of finance company loans; the more the lower the score

A logical first step in home buying is to check your credit report and see where you stand. If your credit needs a little primping, most lenders have programs to help you work on your credit. Sometimes, in cases where the damage is great, a hopeful borrower might want to work with a credit specialist to repair their credit score. [we know a great one!]

Keeping good credit is valuable even if you aren’t in the market to buy a home at the moment. Your interest rates on a car or other installment loan, as well as on credit cards will be lower with a good credit score, saving more of your hard-earned dollars every month.

Credit Scores and Mortgages

Although there are other qualifiers considered, the most influential determinant of your ability to get a mortgage is your credit score. The higher the score, the more mortgage options are available and the lower the interest rate, generally.

Many people want to know if they can get a mortgage with a low credit score. The answer depends…

Very often, with lower credit scores, lenders will add what are called lender overlays. Lender overlays are additional requirements or restrictions that a lender may impose on top of the standard guidelines set by a government agency or mortgage investor. These overlays are specific to each lender and can vary in terms of credit score requirements, debt-to-income ratios, down payment amounts, and other factors. Lender overlays are used to manage risk and ensure that borrowers meet certain criteria before being approved for a loan.

A credit score of 740 or higher qualifies for the best interest rates from most lenders. Although you often read that you can get a mortgage with a score of 620, it’s very difficult. The bottom credit score for most mortgages is 640. It’s always wise to get your credit score to a minimum of 660, so that if any last-minute dings happen to your score, you’re still well above the minimum.

Between a minimum 640 and a healthy 740, the rates can vary as much as 1 1/2 points. In today’s mortgage rate climate that can be the difference between 4% and 5.5%. Consider the difference in monthly payments on a $200,000 home:

• 4% rate = $954.83
• 5% rate = $1073.64
• 5 1/2% rate =$1,136

By taking the time to build a good credit score, you can end up saving as much as $181 each month. Over the 30 years of the loan that adds up to $65,160.

ExtraCredit

• OptOutPrescreen.com – Consumer credit reporting companies are allowed, under FAIR Isaac laws, to sell name lists to other companies that, in turn, make offers of credit or insurance. These “Firm Offers” aren’t initiated by you, the consumer. This website is the place where you can opt-out from firm offers, as well as opt-in.
• Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company. One place to get your free reports isAnnualCreditReport.com.Credit counselors advise consumers to get one free report every 4 months from one credit reporting company. With identity theft on the rise, it’s always good to check for errors.
• Additional Resources: Building a Credit Score Lenders will Love,
• How to Repair Your Credit After A Short Sale, and
• Eight Credit Score Myths
• What happens when the lender says no

Contact Us for a list of Preferred Frederick Lenders.

Pin for Later Reading:https://www.pinterest.com/pin/4292562130227426/

Related