If you don’t have good credit, you cannot get a mortgage—simple as that. Due to the importance of having good credit in the pursuit of homeownership, here is a summary of what goes into your FICO score (FICO is short for Fair Isaac Corporation, which is the well known company that provides software for calculating a person’s credit score that the majority of lenders use).
FICO scores are calculated from many different pieces of credit data in your credit report. This data is grouped into five categories, which include:
- 1.35% payment history
- 2.30% amounts owed
- 3.15% length of credit history
- 4.10% new credit
- 5.10% credit mix
The percentages in the above categories reflect how important each is in determining how your FICO scores are calculated. Base FICOscores have a 300–850 score range. Generally speaking, scores above 600 are needed to get approved for a home loan, but the exact score needed varies from lender to lender.
Your FICO scores consider both positive and negative information in your credit report. Late payments will lower your FICO Scores, but the older the negative reporting is, the less it will count towards a lower score. The newer good payment patterns that show on your credit report will help the past credit problems fade over time.
There is also the problem of having no credit score. In order to establish a credit score, you generally need at least one account that has been reported to the credit bureau for the last six months.
Many people worry that allowing more than one lender to pull their credit report will negatively affect their credit score. But FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. So, FICO recommends you should do your rate shopping within a focused period of time. Also, it’s ok to check your own credit report, and this won’t affect your credit report as long as you order the report directly from the credit reporting agency.
To keep a healthy credit score you should check your credit report regularly, make your payments on time (setting up credit cards on auto pay is a helpful tool to remember to make your payments on time), and reduce the amount of debt that you owe.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
