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FICO

FICOYour FICO score is your credit risk report card. Your report lists specific information including credit cards you have opened and closed, balance activity and any loans you have. The higher the score, the more willing lenders are to lend you their money. A low FICO score could indicate your inability to make your loan payments Generally, a FICO score falls between 300 and 850. A score below 600 indicates a bad credit risk, while a score above 700 is considered good credit.Five factors determine your FICO score

  1. Paying bills on time

  2. Amount of outstanding debt

  3. Overuse of credit

  4. Number of new accounts opened or applied for recently and credit types

  5. Length of credit history

Fortunately you can do something to improve your score. If you have no credit at all, establish credit at a chain store. Pay bills on time and do not sign up for new debt.By knowing what factors affect your score, you can get the numbers running in your favor, and before you know it, your credit will be in top-notch shape.
Prequalify and Preapproval - the differencePrequalifying is an informal process - loan agent or mortgage broker issues a letter stating that if the information they received from the buyer is accurate, then the buyer should be able to qualify for a loanPreapproval is a formal process - buyer makes loan application to lender and the buyer's credit is checked, employment verification and source of down payment funds. This is then looked over by an underwriter who reviews this information. If everything is in order, the lender then sends a letter saying that they are approved for a loan subject to a satisfactory appraisal and title search FICO Score - a Brief Explanation When you apply for a mortgage loan, you expect your lender to pull a credit report and look at whether you've made your payments on time. What you may not expect is that they seem to be more interested in your "FICO" score.

"What's a FICO score?" is a common reaction.

Each time your credit report is pulled, it is run through a computer program with a built-in scorecard. Points are awarded or deducted based on certain items such as how long you have had credit cards, whether you make your payments on time, if your credit balances are near maximum, and assorted other variables. When the credit report prints in your lender's office, the total score is displayed. Your score can be anywhere between the high 300's and the low 800's.

Lenders wanted to determine if there was any relationship between these credit scores and whether borrowers made their payments on time, so they did a study. The study showed that borrowers with scores above 680 almost always made their payments on time. Borrowers with scores below 600 seemed fairly certain to develop problems.

As a result, credit scoring became a more important factor in approving mortgage loans. Credit scores also made it easier to develop artificial intelligence computer programs that could make a "yes" decision for loans that should obviously be approved. Nowadays, a computer and not a person may have actually approved your mortgage.

In short, lower credit scores require a more thorough review than higher scores. Often, mortgage lenders will not even consider a score below 600.

Some of the things that affect your FICO score are:
   Delinquencies   Too many accounts opened within the last twelve months   Short credit history   Balances on revolving credit are near the maximum limits   Public records, such as tax liens, judgments or bankruptcies   No recent credit card balances   Too many recent credit inquiries   Too few revolving accounts   Too many revolving accounts

FICO actually stands for Fair Isaac and Company, which is the company used by the Experian (formerly TRW) credit bureau to calculate credit scores. Trans-Union and Equifax are two other credit bureaus who also provide credit scores.
WHAT'S A FICO? What is a FICO Score?

FICO stands for Fair Isaac & Company and is the name for the most well known credit scoring system, used by Experian. The credit bureau's computer evaluates a complete credit profile and assigns a score, which is used to estimate credit worthiness. Each of the three bureaus (Experian, Trans Union, Equifax) employs its own scoring system, so a given person will usually have 3 separate scores. Someone with a higher score will be viewed as a better risk than someone with a lower score. Typically, scores will range from about 600 to 700 or above, although some cases will be outside this range.

What Kind of Score Do I Need for a Home Loan?

There are as many answers to this question as there are loan programs available. Most lenders will take the average of all 3 scores to evaluate an application. "Niche" loans, such as Easy Qualifier and low down payment loans will have the higher FICO requirements.

How is My Score Determined?

The FICO model has 5 main elements:

1) Past payment history (about 35% of score) The fewer the late payments the better. Recent late payments will have a much greater impact than a very old Bankruptcy with perfect credit since.

Myth - paying off cards with recent late payments will fix things. Payoffs do not affect payment history.

2) Credit use (about 30% of score) Low balances across several cards is better than the same balance concentrated on a few cards used closer to maximums. Too many cards can bring down the score, but closing accounts can often do more harm than good if the entire profile is not considered. BE CAREFUL WHEN CLOSING ACCOUNTS!

3) Length of credit history (15% of score) The longer accounts have been open the better for the score. Opening new accounts and closing seasoned accounts can bring down a score a great deal.


4) Types of credit used (10% of score) Finance company accounts score lower than bank or department store accounts.

5) Inquiries (10% of score) Multiple inquiries can be a risk if several cards are applied for or other accounts are close to maxed out. Multiple mortgage or car inquiries within a 14 day period are counted as one inquiry.

How Can I Raise My Score

Your score can only be changed by the way that item is reported directly to the credit bureaus (Experian, TU, Equifax). Written confirmation from the creditor is required. It is best to make these corrections before you try to purchase a home, because you can never be sure the exact impact a change will have on your score.

What Does This Mean to Me?

You should have your credit reviewed BEFORE you look for a home, and work with a PROFESSIONAL loan officer to make sure your loan is based on the most accurate information.

 

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