Your Credit Score

Understanding Your FICO Score and How it Affects Home Buying

Home buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the initial interest rate that a lender offers.

What is a Credit Score?

A credit score is a number that lenders use to estimate risk. Experience has shown that borrowers with higher credit scores are less likely to default on a loan.

How are Credit Scores Calculated?

Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't necessarily use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.

Why Are Credit Scores Sometimes Called FICO Scores?

The software used to calculate a great number of credit scores was created by Fair Isaac Corporation - FICO.

Which Parts Of The Credit History Are Most Important?

  • 35% - Your Payment History
  • 30% - Amounts You Owe
  • 15% - Length Of Your Credit History
  • 10% - Types Of Credit Used
  • 10% - Types Of Credit Used
  • 10% - New Credit

Your Payment History Includes:

  • Number of accounts paid as agreed
  • Negative public records or collections
  • Delinquent accounts including:
  • 1. Total number of past due items
    2. How long you've been past due
    3. How long it's been since you had a past due payment

What You Owe

  • How much you owe on accounts and the types of accounts with balances
  • How much of your revolving credit lines you've used - looking for indications you are over extended
  • Amounts you owe on installment loan accounts vs their original balances - to make sure you are paying them down consistently
  • Number of zero balance accounts

Length Of Credit History

  • Total Length of time tracked by your credit report
  • Length of time since accounts were opened
  • Time that's passed since the last activity
  • The longer your (good) history, the better your scores

Types Of Credit

  • Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
  • A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)

Your New Credit

  • Number of accounts you've recently opened and the proportion of new accounts to total accounts
  • Number of recent credit inquiries
  • The time that's passed since recent inquiries or newly-opened accounts
  • If you've re-established a positive credit history after encountering payment problems
  • In general, checking to make sue you aren't attempting to open numerous new accounts

Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report such as income, employment history and the type of credit you are seeking.

What Is A Good Credit Score?

Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.
Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower, because there's a mortgage product (plan) for nearly everyone.
Here's a look at credit scores among the US population most recently:

  • Up to 499 : 1%
  • 500-549 : 5%
  • 550-599 : 7%
  • 600 - 649 : 11%
  • 650 - 699 : 16%
  • 700 - 749 : 20%
  • 750 - 799 : 29%
  • Over 800 : 11%

Multiple Credit Scores

Your bank will pull credit reports and scores from all three major credit reporting agencies: Trans union, Equifax and Experian. They'll probably use the middle score to work your loan application. Ask your lender to explain which credit scores will be used and how they affect your loan application.