What are FICO scores and how they impact your mortgage rates.
What is a FICO score and what does it mean: (The following information is the basic concept for general education and cannot be taken as legal advice.)
FICO stands for Fair Isaac Corporation. They played a key role in inventing credit scoring.
FICO scores are about your past history of paying off your debts. It’s not about income, assets, or anything else. It is a number that trys to predict your ability to pay off a debt, given your past history of doing so.
A FICO score is a number between 300-850: Generally anything over 720 is considered acceptable, between 620 and 720 is considered marginal, and anything below 620 is considered bad credit.
Approximately: 35% of the score is based on payment history (bills, bankruptcy, late taxes, etc) Recent “lates” count more Note: Date of last activity is important (if you made a recent payment on an old, late, loan, it counts a lot, lawsuits hurt a lot – especially if you lose the suit) The larger the amount, and the later it is, the more impact (small amounts count less) eg (in order of importance) bankruptcies, foreclosures, repossessions, charge offs/collections, late payments
Approximately 30 % is based on outstanding balances (primarily credit cards, amount carried, % of limit) 90% is credit cards, (Keep balances low <70%, 50, 30, or 10%, of total limit)
About 15% is based on the average length of time you have had credit Closing a credit card reduces your score (it reduces average amount of time you’ve had credit)
About 10% is based on inquiries into your credit history (# of times you apply for credit) Promotional inquiries (no formal loan application), and account reviews don’t count on score All mortgage and auto inquires within a 14 day period count as one inquiry Only the first 10 inquiries count, and only for one year Make sure account reviews are coded correctly, a mistake counts as an inquiry
About 10% types of credit (installment – cars, revolving – credit cards, mortgages) HELOC’s cutoff is 40k, (< 40k is treated like a revolving credit, >40k is treated like a mortgage)
So, what does this mean to a potential borrower ?? A LOT!!
If you have a low score (below 600) it is extremely difficult to find a lender that will loan you money.
And the opposite is true as well. The higher the score, the easier it is to borrow and just as important, it costs you less to borrow the money. If you have a high credit score you may save several thousand dollars on the up-ftont costs on a new loan.