The housing market has seen many ups and down recently. And one thing that many homeowners have relied on in the past is their credit score to help them determine their ability to get a good home loan at an affordable rate.
The FICO score is one of these. Many times, it’s this score that prevents homeowners from qualifying for a home loan they are after. As with any other credit score, having a high FICO score can mean that you save thousands of dollars. But, as with other scores, your FICO score can also mean that you pay more money.
What Is The FICO Score?
FICO stands for Fair Isaac Corporation, which is a company that is in the business of crunching and then publishing credit score numbers in order that creditors and consumers can view them. This company specializes in analysis and decision management products, and as such, is one of the top providers of these products in the world. As a result, the terms ‘credit score’ and ‘FICO score’ are used interchangeably.
Why Knowing Your FICO Score Is Important
It is vital to know your FICO score when searching for a home loan. This is because most lenders will look at your FICO score, which they acquire from the three major credit companies, when assessing your loan eligibility. Because every homeowner will be different, it is important to contact your lender and ask them what your FICO score needs to be. This should be done before you attempt to qualify for any rate, but especially the best rates for your home loan. If your FICO score is low, it may mean that you have to wait until your score improves to apply for a home loan.
How FICO Scores Affect Your Loan Approval
The lower your credit score is, the more risk you are to a lender, and the less they will allow you to borrow. Your FICO score can range anywhere from 300, which is low, to 850, which is the best score you can obtain. If your score is between 650 and 699, you are generally considered by lenders to have a moderate score, and are therefore in a good position for getting a home loan. Those with scores less than 600 account for about a quarter of consumers.
Of the three scores your lender acquires from bureaus Equifax, TransUnion and Experian, it’s the score which falls in the middle that they will use when it comes time to evaluate your application. So if your three scores are 580, 655 and 710, your lender will use your 655 score in their evaluation.
FICO Scores Also Affect Interest Rates
If you’re concerned about how much you will pay on your mortgage each month, then you should know this largely depends on your FICO score. The better your score, the lower the rate you will get, because you will appear as far less of a risk to your lender.
Of course, the bad thing about this is that if you have a low credit score, you will likely pay more. However, it should be remembered that credit score is considered so that monthly payments are in line with what you can afford, making it much less likely that you will default on your payments.
If home ownership is something you really want, then taking steps to boost a low FICO score will definitely be in your best interest. However, it will take time as well as patience and perseverance to improve your score. As well, you may have to dispute any data that negatively affects your credit if you don’t feel it is accurate. And negotiating payment plans and settlements can actually help to boost your FICO score, resulting in lower mortgage rates down the road.
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Guest author Tony Caruso writes on a variety of topics related to the mortgage industry. He recommends The Refi Guide for useful tips for both first-time home buyers or consumers who wish to refinance.