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WHAT'S A
FICO?
What is a FICO Score?
FICO stands for Fair Isaac & Company and is the name for the
most well known credit scoring system, used by Experian. The credit
bureau's computer evaluates a complete credit profile and assigns a score,
which is used to estimate credit worthiness. Each of the three bureaus
(Experian, Trans Union, Equifax) employs its own scoring system, so a
given person will usually have 3 separate scores. Someone with a higher
score will be viewed as a better risk than someone with a lower score.
Typically, scores will range from about 600 to 700 or above, although some
cases will be outside this range.
What Kind of Score Do I Need
for a Home Loan?
There are as many answers to this question as
there are loan programs available. Most lenders will take the average of
all 3 scores to evaluate an application. "Niche" loans, such as Easy
Qualifier and low down payment loans will have the higher FICO
requirements.
How is My Score Determined?
The FICO
model has 5 main elements:
1) Past payment history (about
35% of score) The fewer the late payments the better. Recent late payments
will have a much greater impact than a very old Bankruptcy with perfect
credit since.
Myth - paying off cards with recent late
payments will fix things. Payoffs do not affect payment history.
2) Credit use (about 30% of score) Low balances across
several cards is better than the same balance concentrated on a few cards
used closer to maximums. Too many cards can bring down the score, but
closing accounts can often do more harm than good if the entire profile is
not considered. BE CAREFUL WHEN CLOSING ACCOUNTS!
3) Length
of credit history (15% of score) The longer accounts have been open the
better for the score. Opening new accounts and closing seasoned accounts
can bring down a score a great deal.
4) Types of credit
used (10% of score) Finance company accounts score lower than bank or
department store accounts.
5) Inquiries (10% of score)
Multiple inquiries can be a risk if several cards are applied for or other
accounts are close to maxed out. Multiple mortgage or car inquiries within
a 14 day period are counted as one inquiry.
How Can I Raise My
Score
Your score can only be changed by the way that item is
reported directly to the credit bureaus (Experian, TU, Equifax). Written
confirmation from the creditor is required. It is best to make these
corrections before you try to purchase a home, because you can never be
sure the exact impact a change will have on your score.
What
Does This Mean to Me?
You should have your credit reviewed
BEFORE you look for a home, and work with a PROFESSIONAL loan officer to
make sure your loan is based on the most accurate information.
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