If you are starting to look for a home or have actually already found a home and are trying to get a mortgage, you’ve probably heard a lot about how important your credit score and report are to the whole process. But how and why does that one number affect your eligibility for a mortgage?
In general, most people know that if you have good credit, you will get good interest rates and if you have bad credit you will get less desirable interest rates, if the lender will even work with you. The truth is that what kind of mortgage you can get, what terms it will have, and its interest rates will hinge largely on the information in your credit report and the health of your credit score. But each lender will take a different approach to the mortgage process. This is why it’s important to “shop around” for the right lender, especially if your credit score is average or lower than average.
What is FICO?
FICO stands for Fair Isaac Corporation. This company sets the standards for credit scores, which standards are used by just about every lender in the US. Each individual lender will probably have their own scoring system for mortgage applications, of which the FICO score is just one—but these algorithms are individual to the lender and rarely shared with the public.
The formula for the FICO score, however, is public knowledge. Taking information from the three largest credit reporting agencies, they generate their score based on:
- 35% – payment history
- 30% – amount owed
- 15% – length of history
- 10% – types of credit used
- 10% – new credit
How Does Score Relate to Eligibility for a Mortgage?
The first thing you should know is that you actually have three credit scores. Each reporting agency formulates their own score, all of which your lender may look at. Some lenders take the lowest score of the bunch. If you are buying the house with another person, they may look at all six credit scores and take the lowest of all six.
Most conventional lenders want their borrowers to have a score of at least 620. Lenders who provide Federal Housing Administration loans usually bottom out at around 580. However, there are plenty of lenders and situations in which lower credit scores will be accepted by a lender. Each individual situation is different and the best way to know whether or not you qualify for a loan with a specific lender is to ask that lender!