Posted 4 years, 5 months ago

When you apply for a new home loan, we will run a credit report as part of the approval process.  Your credit report provides critical information such as your monthly revolving debt, total amount owed, and payment history.  All of these factors assist us in the underwriting process and reaching a final credit decision. 

FICO Score

Another important aspect of the credit report is the actual FICO score.  FICO is an acronym for the Fair Isaac Corporation, the company that first introduced the FICO scoring method in 1956.  The scoring method analyzes five categories listed below to assign a number ranging between 300 and 850.  The higher your FICO score, the better your overall credit ranking.  In order to calculate your FICO score, FICO analyzes your specific data with the following average weightings:   

 

  • Payment History--35%  How you've handled credit cards, retail accounts, installment loans, finance company accounts, mortgages, etc.  FICO also looks into public records such as bankruptcy, wage attachments, and collections.  For payment delinquencies, they want to know, how much, how many, and how long ago they occurred.
  • Amounts Owed--30%  What you owe, what types of accounts, and how many.  The percentage of your credit line your balances typically use and the percent of the principal still owed on installment loans.
  • Length of Credit History--15%  How long the account's been opened, its specific type, and account activity.
  • New Credit--10%  Number and proportion of recently opened accounts and recent credit inquiries.  Time since account openings and credit inquiries.  Is this a re-establishment of positive credit history following past payment problems?
  • Types of Credit Used--10%  Number of and recent information on all the various types of accounts you use -- credit cards, retail accounts, installment loans, mortgages, consumer finance accounts, etc.

 

When we run your credit report, the report will provide data from three independent credit repositories (Equifax, Transunion, and Experian).  Each of these repositories will provide a unique FICO score.  We will use your middle FICO score, or “mid FICO score,” as the baseline score to be used for qualification purposes and any interest rate adjustments.  For example, if your three FICO scores are 720, 735, and 740, your mid FICO score would be 735.  The lowest mid FICO score would be used if there is more than one borrower.  For example, if your mid FICO score is 735 and the co-borrower’s mid FICO score is 720, we would use 720.

Conclusion

Your FICO score is important because not only does it assist lenders to determine whether you qualify for a new home loan, but it also may affect your interest rate.  The general rule is that a higher FICO score translates to a lower interest rate.  Please don’t hesitate to contact us with any questions or if you would like us to review your personal credit report.  We can often times help improve your credit score which will assist you in qualifying for a home loan and/or help you obtain better overall loan terms.

-The Kavanewsky Team