Tips on 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 with your finances. Saving your money for a down payment is a good idea, but if you don't have an acceptable credit score to reinforce it, you could find yourself renting longer than you expected in Edmond until your score improves.
A FICO score is a collection of your years of credit history based on a model developed by Fair Isaac and Company. Most people traditionally have a score of 600, but scores range from 300 to 850. With the change in the economy, however, some borrowers have seen their score drop by hundreds of points as a result of underemployment, delinquent credit card accounts, or credit card accounts terminated because the card didn't carry a high balance. Some of the factors in determining your FICO score are:
- Credit Inquiries — How many times has your credit history been accessed by someone other than you?
- Types of Credit — Do you have a healthy mix of loans and credit cards?
- Payment History — How many late payments have you made?
- Credit to Debt Ratio — How much do you owe versus your available credit?
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 determine your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. Because of this, you have three scores, one for each bureau.
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 an insight into what type of borrower you are solely because of your credit history. Because of the shift in the economy, most home buyers should have scores in the range of 740 or higher to get an acceptable interest rate. You'll still get approved for a mortgage with a lower score, but the interest accrued over the life of the loan could be more than double the amount of someone having a higher FICO score.
Getting your credit in order is the first step in purchasing a home. Contact us and we can help you get on the right track to the home of your dreams.
How do you boost your credit score? Improving your FICO score takes time. It can be rare to make a significant stride change in your number with small changes, but your score can improve in a year by keeping tabs your credit report and by using your credit wisely. The best way to do this is to know your FICO score. Here are some ways you can improve your credit score:
- Apply for gas cards or department store credit. For those who have no credit or below average credit, retail credit cards and gas credit cards are ways to get credit, increase your credit limits and have a solid payment history, which will raise your credit. You should always avoid maintaining a large balance for more than a couple of billing cycles because these types of cards usually have a larger interest rate.
- Use your credit. 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. How often you're late with payments greatly affects your credit score. It's one of the reasons people who have recently been unemployed see the biggest hit in their credit score. Yes, it takes longer to rebuild your credit with payment history, but it's the surest way to prove that you're responsible enough to make payments to a lender.
- Ensure that your credit history is correct. If you find mistakes on your credit report, write to the bureau requesting 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 want to avoid of having one card that is at the maximum and have your remaining cards at a zero balance. It's better to have each of your cards at about 30% of their credit limit than to have all of your debt sitting on a single card.
Knowing the ways you can raise your FICO score, you can move toward becoming a homeowner. Keep in mind 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 a negative mark on your credit score. With the help of Metro First Realty, shopping for a mortgage can be a stress-free experience so you, too, can become a homeowner.
To learn more, visit myFICO.com, Fair Isaac's informational site and you can review all of your credit reports for free each year 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.