When reviewing mortgage applications, lenders base their decisions largely on the potential borrower's credit history. Each time a lender draws an applicant's credit history, they run it through a program that generates a FICO Score. Points are deducted or awarded based on specific criteria, such as payment history on other credit products, and the current limits and balances on other credit products. FICO scores can range from 300 to 800, with lower credit scores requiring a more thorough review than higher credit scores. Some lenders may only consider applicants if their FICO score is above 600.
FICO is an acronym for Fair Isaac & Company, the most well known credit scoring system. The credit bureau uses this sysytem to weigh a complete credit history and assign it a score, which is then used to estimate credit worthiness. Typical scores range from 600 to 700 or higher.
The FICO model, also reffered to as the Beacon Score takes into consideration five main factors:
Payment history weighs heavily as to how you are percieved as a potential borrower. It is extremely important that you have no current late payments. These are more detrimental to a loan application than record of an old bankruptcy case, if perfect credit has been maintained since the bankruptcy. Keep in mind that paying off credit cards with recent late payments will not fix your credit history. Only time, and making your payments when due, can erase the negative effect of late payments.
It is important to illustrate that you can use credit responsibly. The longer you have had a credit account open, the better you will score. Maintaining low balances across several credit cards is better viewed than having fewer cards with higher maximized balances, but maintaining too many credit cards can negatively affect your FICO score. Also note that closing several accounts can actually harm your credit profile.
The type of credit that you use will also have an impact. Credit received through a bank or department store is viewed better than high-interest credit attained through a finance company. Multiple inquiries can be a risk to borrowers if several cards are applied for, or other accounts carry the maximum allowable balance.
To change your FICO score you must change how the problematic item in your credit history is being reported to the credit bureau. Written confirmation from the creditor is required if you wish to change how an item is being reported. It is better to make these changes to your credit profile before you attempt to purchase a property. You cannot guarantee how changes will impact your score.
Have your credit history reviewed by a professional loan officer before you start looking for a property to purchase. The loan officer can ensure that your loan is based on your most accurate and up-to-date credit information.
FICO scores are, essentially, just guidelines, and don't mean that you cannot be approved even if your FICO score is low. There are other factors that can affect underwriting decisions based on credit worthiness. Some factors that might persuade an underwriter to be more lenient towards granting a loan to a borrower with a lower FICO score include:
As a potential homebuyer, it is important to remember that credit scores are also very important in securing the best interest rate on your mortgage product. Some lenders have a base loan price, but will reduce the points on the loan if the credit score is above a certain level, while Other lenders may decide to add points or costs onto the base price if your credit score is below their preferred score. It is always in your best interest to protect and check your credit rating before you apply for your mortgage.