Credit scores | mortgage approval
Credit scores are arrived at by inputting information about your credit history and behavior into a mathematical model. Those based on the model developed by Fair Isaac and Company are called FICO scores and are used by most mortgage lenders.
Lenders are looking for ways to weed out risky borrowers, so good credit scores are as vital to homebuyers as they have ever been. Great mortgage rates are available, but they will only go to those with the very best credit scores. Fair Isaac describes its FICO score as “an estimate of your credit risk based on a snapshot of your credit report at a particular point in time.” FICO scores range from 300 to 850 (a high score is good). Scores above 720 to 740 typically qualify for the best rates. For every 20 points or so lower that your score is, you will be paying increasingly more discount points up front or higher interest rates.
We’re not totally sold on where Fair Isaac has set its score demarcations on the site, though. For instance the company has scores of 760 to 850 getting the best rates, which is on the high side. Still, it is a helpful guide. Complicating matters this year, is that Fair Isaac has begun to roll out a new version of its scoring system, FICO 08. The new system leaves the 300-850 score range intact, but has modified how those scores are arrived at, with new predictive variables and a greater number of risk profile groups. There are three major credit reporting agencies, each of which maintains your credit history-Experian, Equifax, and TransUnion-and a separate credit score is generated based on the information at each one.
Because each credit agency may have slightly or even significantly different information, your score can vary from agency to agency. Mortgage lenders generally request scores from all three agencies and look at the middle one. According to Fair Isaac, your credit payment history is responsible for 35% of your FICO score; amounts you owe, 30%; length of your credit history, 15%; applications for new credit, 10%; and types of credit used, 10%.
Caution: other web sites may offer you a free credit report or score, but it probably is not a FICO score and may subject you to their advertising pitches. If you get a free credit report from one of the agencies, they will be happy to sell you your score at the same time, but the Experian and Trans-Union scores will not be FICO scores and will have a different scoring range. Here are some tips for boosting and maintaining your credit score, maintaining courtesy of Fair Isaac:
Closing unused credit accounts won’t increase your score, in fact it may decrease it by having fewer open accounts. But don’t open new accounts just to increase your available credit; that could actually lower your score. If you are starting to establish credit, don’t open a lot of accounts all at once. Credit inquiries can lower your score. However, FICO scores distinguish between searching for a single loan among several ders and applying for multiple credit lines. Try to fit your comparison shopping within a two week period.
Want more information? You can get booklets that provide an overview of credit scoring, including more factors that influence credit scores and tips on improving them at annualcreditreport.com.© 2009, Real Estate Information Services, Capitol Assets, & Choice Finance®