When you are buying a home for the first time, there is a lot you don’t know. If you have been around the credit block a few times, you know what a FICO Score means to your creditworthiness. When you apply for a home mortgage, it is a pivotal criterion. Too low and it is no go.
What Is a FICO Score Exactly
FICO, an acronym for Fair Isaac Corporation, developed the credit scoring model used by most lending institutions. It is a summary of all financial information submitted by your creditors that will help a lender predict how likely you will be to repay your loan. Additionally, it is an essential factor in whether or not you will be buying a home.
It is essential to know what criteria the model uses to analyze your credit. If your score is too low, this can determine where the problem lies. It is necessary to pinpoint what area needs improvement when .you work to raise your score. Here are the five factors that make up your FICO.
Paying your bills on time is number one in importance. Each time you have a late payment, it lowers the score. The best and easiest way to raise your score is to pay all your bills on time every month.
Amount of Money Owed
Carrying too much debt can be detrimental when you are buying a home and need a mortgage. Because monthly credit payments are part of your debt to income ration, that number can limit your opportunities, and choices, when buying a home. If you have high credit card balances, try to bring them down or pay them off entirely.
Length of Credit History
The longer you have accounts open, the better so even if you pay off the balance, do not close your accounts. Also, you should keep your credit active. Believe it or not, if you never use your cards, that works against you. Also having no credit history at all hurts even more.
New Credit Cards
Be aware of your time frame when you apply for credit. Too much in a short space of time has a negative impact on your score.
Having different types of credit helps your score. So it’s good to have a credit card, a car loan, student loans, etc. Especially when you have paid them.
Breaking Down the Score When You are Buying a Home
When you are buying a home, how high does your score need to be exactly? There is a range of scores that are acceptable, but the higher your number, the better terms you can expect from the lending institution. Here is how it breaks down.
350-599 This score is probably too low to get qualified for a mortgage.
600-680 You will probably qualify but won’t receive the best terms
680+ You are likely to qualify with a reasonable interest rate, standard fees
750+ Expect to qualify with the best terms and lowest fees
Keep in mind, there are different programs and options available, but clearly, you can see the higher your score when buying a home, the better your prospects, and outcome.
A word of advice, if your score is low, you might want to improve it before you apply for a mortgage. Even a ¼ of a percentage point can save you thousands over the life of the loan. If you’re buying a home, it all adds up.
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