When you’re shopping around for a new mortgage, one term you can’t escape is FICO score. Every lender bases your mortgage-rate calculation at least in part on your FICO score, but how well do you understand what a FICO score is and how it works?
What Is a FICO Score?
A FICO score is a numerical representation of the quality of your credit history. FICO scores range from 300 to 850 and are used by lenders to understand how you have handled your personal finances, especially the management of your credit. Introduced by the Fair Isaac Corp., a FICO score uses a variety of factors to estimate how likely you are to pay off a loan or credit card balance in the future.
How Is Your FICO Score Calculated?
The FICO scoring model takes into account these five weighted factors to determine your score:
Payment History: One of the most important factors, this component comprises your past credit account payments.
Amounts Owed: This is determined by the amount of credit available to you compared to the amount of debt you owe. Keeping your debt low can boost this part of your score.
Length of Credit History: The longer your credit history, the higher this component of your FICO score. Details considered include how long your credit accounts have been open and the last time you used each of your accounts.
Credit Mix: Your mix of credit cards, loans, and mortgages is taken into account. Adding new lines of credit may or may not improve your score.
New Credit: Opening several credit card accounts or taking on numerous loans over a short period of time can raise a red flag for lenders. Keep new lines of credit to a minimum before shopping for a home loan.
How to Raise Your FICO Score
In general, FICO scores below 640 are viewed negatively by lenders, whereas scores above 740 are ideal. If your score is lower than you would like, there are steps that you can take to increase it. The first step would be to become current on any past-due payments. Talk to your creditors to find out whether you can settle or roll over any overdue payments.
A good second step would be to pay down your existing credit card balances to increase the Amounts Owed component of your FICO score. Ideally, you shouldn’t use more than one-third of your overall available credit. That means if you have a credit card with a $3,000 credit limit, you will want to keep your balance below $1,000.
Paying down debt today frees up your future income to save money for a down payment when you are ready to buy a home
. Making a substantial down payment up front will allow you to make lower monthly mortgage payments after closing. If you are able to make a down payment of 20 percent or more, you can also avoid the additional cost of private mortgage insurance, which is usually required with lower down payments.
When you’re ready to apply for a home loan, call Bank of Internet USA at 1-888-546-2634. One of our friendly Mortgage Consultants will answer any questions you might have about our home loan options, walk you through the mortgage process, and develop a home loan customized specifically to your financial needs and goals.