Improving Your FICO Score for Home Buying
Choosing a lender isn't the first step in becoming a homeowner. In reality, the home buying process begins and ends with your finances. Putting back your money for a down payment is great, but if you don't have a strong credit score to back it up, you could end up renting for another couple of years in Farwell until your score improves.
The Fair Isaac Company bases your FICO score on the summary of your complete credit history. The score ranges from 300 to 850, with the majority of people normally having a score of 650. Job loss has been common in the last few years, but FICO scores aren't necessarily adjusted "on a curve." A low score is just that and often means you can't get a decent interest rate. Some of the pieces in summing up your FICO score include:
- Payment History — How many late payments have you made?
- Credit to Debt Ratio — How much do you owe versus how much credit you have available?
- Credit Inquiries — Do you have too many open accounts?
- Types of Credit — Do you have a healthy mix of credit cards and loans?
In reviewing your credit history, you'll discover that you actually have three reports. Experian, Equifax and TransUnion — three of the major credit reporting agencies — use a slightly different systems to calculate your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. You have a credit score with all of the bureaus.
When you apply for a mortgage or any other loan, lenders want to make sure that extending a loan to you isn't a risk. Your credit score gives lenders a view of what type of borrower you'd be based solely on your credit history. You'll need a score of at least 700 to get a satisfactory interest rate. If your score is less than that, you can still qualify for a loan, but the interest accumulated in the long run could be more than double the amount of an individual with a higher FICO score.
We're used to working with all tiers of FICO scores. Call us at 806-481-3288 and we can help you get on the right track to the home of your dreams.
There are strategies to increase your score. Building your FICO score takes time. It can be hard to make a significant stride change in your FICO score with quick fixes, but your score can improve in a year by monitoring your credit report and by using your credit wisely. The best way to do this is to know your FICO score. You'll improve your credit score by using these pointers:
- Apply for gas station cards or department store credit. For those who have no credit or less-than-stellar credit, department store credit cards and gas credit cards are ways to repair credit, increase your spending limits and stay on top of your payments, which will raise your credit. You must always avoid carrying a high balance for more than a couple of months because these types of cards usually have a higher interest rate.
- Keep your cards active. Whether you have older cards, or are just getting started with credit, be sure to use your cards to make sure your accounts maintain an active status. But, pay them off in no more than two or three payments.
- Keep up with payments. Your credit score plummets with every account that goes to collections. It's where people who have recently experienced job loss see the biggest dip in their credit score. Yes, it takes longer to build up your credit this way, but it's the most reliable way to prove that you're able to make payments to a lender.
- Ensure that your credit history is correct. If you discover mistakes on your credit report, contact the bureau asking that the item be removed. If you have a common name or the same name as a family member, you'll want to give extra care to make sure the activity reported is correct.
- Even out your debt. At first, this doesn't sound like a good idea. But, you steer clear of having one card that is maxed out and have the rest of your cards at a zero balance. It's better to have each of your cards at a smaller balance than to have the majority of your debt transferred to a single card.
Knowing the methods you can use to build up your FICO score, you're one step closer to becoming a homeowner. Remember that when you're ready to apply for a loan to purchase a home, you'll want to keep your credit inquiries within a two-week window to avoid damaging your credit score. With the help of J.B. Sudderth Realty, Inc., shopping for a mortgage can be a stress-free experience so you, too, can achieve home ownership.
Learn more about FICO scores at myFICO.com, Fair Isaac's informational site and once per year, for free, you can review all three of your credit reports at annualcreditreport.com. And, for a small payment, you can get your FICO score from each bureau on their websites: equifax.com, experian.com and transunion.com.