From House To Home

Financing a home is usually the largest and most expensive purchase a consumer makes. Everyone wants the lowest interest rate and the best terms. But one of the most critical factors that determines what a borrower will qualify for is based on his or her credit “report card” or FICO® score.

FICO credit scores were introduced in 1989 by the Fair Isaac Corporation to objectively rate a person’s credit worthiness. Scores are calculated using a model. Whenever a person applies for a mortgage (or other credit, such as a car loan or credit card), the lender pulls the FICO score to evaluate the probability with which that person will pay his or her debts on time.

FICO And Home Loans

Consumers actually have three FICO scores, one from each of the national credit reporting agencies—Equifax, Experian, and TransUnion. Scores are based on payment and credit history information on file and will vary, since not all three agencies have exactly the same data.

Mortgage lenders typically use the applicant’s middle score. Scores range from 300 to 850. The higher the score (e.g. 700 and above), the lower the risk and the better the borrowing terms and interest rate will be.

Keeping Tabs On Your FICO Score

The credit agencies offer online services and products that can help consumers easily monitor their FICO score and understand how their score impacts what kind of interest rate they can qualify for.

For example, Jennifer Costello, director of external communications for Equifax, says Equifax offers a service for $8.95 per month called Score Watch(TM) that automatically tracks a consumer’s FICO credit score and notifies the subscriber by email or text message when any change is detected.

Homebuyers should review their score and credit file at least six months in advance of when they intend to purchase. Those with credit issues who are concerned about qualifying for a loan should discuss their options with their mortgage lender.

Adds Costello, “Consumers should actively monitor their credit score three to four times per year. Not only does it provide a snapshot of an individual’s overall financial health, but by ensuring that the information is up-to-date, it can also help protect consumers against identity theft and help them make informed purchasing decisions.”

To order a free copy of your credit report (annually) from the three credit-reporting bureaus, contact Annual Credit Report Service at www.annualcreditreport.com.

To learn more about FICO, visit www.myFICO.com. The best way to protect your credit is to know and understand FICO and take proactive steps to improve your score. 

Melissa R. Hoberg is an award-winning freelance writer who covers consumer home-financing trends for from house to HOME.

boost your FICO score Before buying a home

• Avoid transferring credit card balances and consolidating debt to a few cards.
• Keep old, unused credit accounts open to show a credit track record.
• Reduce existing balances on credit cards. “Maxed-out” cards can look like a consumer is overextended financially.
• Avoid opening too many new accounts. Activating new credit could be a sign of overspending.
• Pay off debt on time. Making late payments on bills, even those 30 days behind, can negatively impact your FICO score.