Last month, we touched on the three areas to get prepared for qualifying for a mortgage … credit … income … assets. Let’s take a closer look at credit.
How Is Your Credit?
What Is Your FICO Score?
From the interest rate and features you are offered on a credit card to your ability to qualify for a mortgage, your FICO score plays a large part in the bank’s decision-making process. A good score can encourage banks to compete for your business. A bad score can lead to rejection or prohibitive interest rates.
The FICO score was developed by the Fair Isaac Company to predict risks to the lender for any given applicant. The scoring formula compares a number of variables with an individual’s loan repayment history and then selects the ones with a high predictive value for its algorithm. FICO scores are used by all three major credit reporting bureaus: Trans Union, Experian and Equifax. (Note: You must have credit and use it to establish a FICO score.)
You need to know what your credit report is saying about you. Check all three bureaus as the results will differ, partly because creditors do not have to report to all of them. Examine your reports carefully, looking for everything from typing errors, to outdated and incomplete information, to inaccurate account histories. Any mistakes should be disputed in writing, clearly identifying each one and stating why it is incorrect. (See credit bureau addresses and phone numbers at the end of this article).
When applying for a home mortgage, most lender programs will require an average minimum score of 640. In my research, I’ve discovered as many as 15 percent of Americans with a credit score below 600 who are unlikely to qualify for any type of mortgage. Another 12 percent fall between 600 and 649 making it difficult to qualify for many loan programs. And with the current state of the economy, many of these percentages will increase.
Your FICO score goes beyond getting a loan. More and more employers are factoring credit scores into their hiring decisions. Credit scores are routinely used to determine rates for all types of insurance. And landlords may ask permission to pull a credit inquiry before offering an apartment or home to a tenant.
Overall, your FICO score is critical to your financial life. Make sure you understand your financial decisions, their effect on your FICO score, and the impact of the score on many aspects of your life.
