Credit Score Tips for Home Buyers
Basic dos and don'ts to get the best loan for your new home.
Credit Security Group can help you qualify for home loans and get the best rate possible.
If you're buying a home and want to increase your credit score to qualify for a home loan – or to save thousands on interest payments caused by low scores – use the form below to contact us.
FICO Mortgage Scores: The Only Ones That Count
Pay attention to your FICO mortgage score; avoid FAKO scores. Only Fair Isaac Corporation mortgage scores are accepted by lenders to qualify for loans. Many online scores are what we call FAKOs. They are not FICO scores. You will find FAKOs at FreeCreditReport.com, Experian’s Credit Plus score, Trans Union’s TrueCreditScore and many others.
Free credit scores can also be FICO scores, but not the ones used by mortgage lenders (FICO mortgage scores).
Also, your free credit score can often be much higher than your score for mortgage loans. See Free Credit Scores Confuse Homebuyers for more information on this topic.
A mortgage professional can tell you your FICO mortgage score when you apply for a home loan. MyFICO.com is the only place to get your FICO mortgage score online.
Small Mistakes Cost You Big Points
One 30-day late payment will lower a 680 credit score 40-80 points. Why so many points? FICO scoring is a future risk assessment, so it assumes that there is a high likelihood that the late payment was caused by a real cash shortfall. FICO is anticipating that the consumer is essentially broke, and this late payment is the first sign of future defaults or possible bankruptcy.
Time Heals; Recency Kills
Bad events lose their punch over time.
The "recency" aspect of a negative event influences your score the most. We put recency in quotes because many creditors, and most collection companies, report incorrect recency data to the credit bureaus. (Some errors can be corrected by bureau disputes.)
Creditors Make Errors that Decrease Your Credit Score
The error that creditors always seem to make is to report a bad event as more recent than it actually was. This lowers your score and makes you appear less credit worthy than you really are. Your score will recover as time passes – if there are no new bad events.
Revolving Accounts Matter The Most
Revolving accounts, such as credit cards, are by far the most score influencing. Because installment and revolving accounts were created for different reasons, they have a significantly different influence on scores.
Installment accounts were designed for long term financing. Mortgage and Auto Loans are Installment accounts. Revolving accounts were designed for short term, 30-day to 90-day, debts. FICO is weighted toward revolving debt which it regards as a much better indicator of credit worthiness. It's better test of your ability to not buy something – on credit – even though you can.
Think about what a teenager usually does with his or her first credit card, and you have an idea of FICO’s thinking here.
Dollar Amounts Don’t Count
It is not the dollar amount of credit card balances that influence scores, but rather the ratio of the balance to the limit. FICO scoring looks at credit cards (revolving accounts) solely as a percentage ratio of the balance to the limit. The higher this percentage, the lower the scores. Because FICO is designed to assess future risk, it has to assume that every dollar it sees on a credit card balance is a dollar not in the bank. Put another way: FICO assumes if the money was in the bank, the consumer would pay down the credit card to avoid interest costs.
Avoid New Accounts Before Major Purchases
New credit accounts lower scores. The more new accounts a consumer opens in a short time span, the riskier it is to give them one more account. This effect is separate from – and in addition to – the score decreases from the credit inquiries to open the accounts. Therefore the rule is: Never open a new account within eight months of a major purchase.
If your goal is to buy a home and you want to achieve the highest credit score possible – for the lowest interest rate – contact us for a Credit Security Analysis. We'll provide education, analyze your credit as it relates to your home goals, and develop a realistic, personalized plan for you.
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