Buying a home will be the most significant investment you will make. Since most people aren’t independently wealthy and can’t buy a house with cash, you will need to borrow some money from a bank to pay for a home. When a bank chooses to loan you money, they are investing in you. Since they don’t know you personally, they have to count on several factors to see what kind of risk it is to loan you money. FICO scores are one of the measures that banks take into account when looking at your viability to lend money to. What is FICO and how does it affect your ability to get a mortgage loan?
What is FICO?
FICO is short for Fair Isaac Corporation, who created the measure. FICO is a standard measure used to determine if you are eligible for a loan. It is one factor used to come up with the interest and fees you will pay a lender for borrowing money for your mortgage.
What makes up your FICO?
The first thing you should know about your FICO score is that it varies slightly between the three major credit bureaus. The three major ones (Equifax, Experian, and Transunion) score things slightly differently. If the scores are too different, you should contact the company to see what you can do to improve your score. Some of the factors that make up a FICO score are:
Length of credit history
Types of Credit
Payment history is the most critical factor of your FICO score. Making at least your minimum payment and on time is a big part of your payment history. Banks know that if you have made your payments on time in the past, there is a high chance that you will continue to make them every month for your mortgage.
The amount you owe in total impacts your FICO score. If you have lots of debt, this can negatively affect your score. Paying cash and using credit only for things you can pay off every month is an excellent way to keep your debt down and raise your FICO score.
Length of Credit History
The longer you have some credit, the better chance you have to raise your FICO score. Banks have a long history to look at, which helps them better able to determine if you are a good risk.
Types of Credit
Your FICO score looks at the different types of credit. Having different kinds of credit, such as school loans, car loans, or mortgages tell the story of your credit history. Banks look at more variety of loans as a way to see how you can handle different types of loans.
Getting new credit right before getting a mortgage loan is one of the biggest mistakes lenders make. A real estate agent will tell you not to make any significant credit purchases to increase your chances to get a mortgage loan. A bank will see a substantial investment as a red flag because they will see less of your money going toward your home loans.
Knowing how your score is affected will give you the knowledge you need to make better financial decisions. When you have a good FICO score, this will help you get the mortgage loan you desire and help you get the best possible lending rate for your home.