The most important aspect of qualifying for a mortgage these days is your FICO score. FICO stands for Fair Isaac COpmany which is the company that developed the algorithm that computes your credit score.
Before you begin the shopping in earnest for a house, the very first thing you need to get a handle on is where you stand with your credit score. Generally speaking, credit scores range from 350 to 850. The higher the score the better. When you first apply for your mortgage, the loan officer should discuss your credit profile with you. If they haven’t, find a new loan officer or just call me.
Mortgage lenders receive three FICO scores from from the major credit bureaus which are Experian, Transunion, and Equifax. They will go off the MIDDLE score. So your high and low scores are dismissed. For example, Experian gives you a 780, Transunion gives you a 720, and Equifax a 740. The banks consider you to have a 740 FICO score for the purposes of your mortgage application. The other scores are irrelevant.
There are several factors that affect your FICO score. While the specific FICO algorithms are proprietary, generally speaking your FICO score is computed from:
35% Payment History
30% Amounts Owed
15% Length of Credit (Time)
10% New Credit
10% Type of Credit
While these percentages are informative, the bottom line though is if you pay stuff on time, you will have good credit. If you don’t, you will have bad credit. At the end of the day, it really is that simple. However, in a later post, I will share some tricks to help boost your score if you happen to be on the margins.
Consumers often think banks care about the back story with their scores. Newsflash… we don’t. Seriously, your score is your score and the story is irrelevant. The bank really couldn’t careless why your cousin didn’t pay the car note when he said he would. It wasn’t paid, it messed up your credit score and that is the end of the discussion which is why it is extremely important that you manage and protect your credit rating aggressively.
