When applying for a mortgage loan, you'll likely encounter the term "FICO" at some point. And even if you don't hear the phrase mentioned, FICO is there in the background, affecting your chances of loan approval and influencing your interest rate.
So what is FICO, and how does it affect your chances of qualifying for a mortgage loan?
FICO is a computerized credit-scoring model named after the Fair Isaac Corporation, the company that developed it decades ago.
How FICO Affects You
The big three credit-reporting bureaus – Experian, Equifax and Trans Union – use the FICO scoring model to convert your credit history into a credit score. Mortgage lenders in turn use that score to decide whether or not you qualify for a mortgage loan, and to determine what interest rate you'll pay.
Of course, there are other factors that influence these decisions, but FICO plays a leading role. In other words, your FICO score helps mortgage lenders determine your credit worthiness, how likely you are to pay off your debt, and what risk category you fall into.
The higher your FICO score the better, as evidenced by the scoring brackets below:
650 – 850: The "go ahead" category. Low risk to lender. Applicant has good chance of qualifying for a mortgage loan.
620 – 650: The "possible" category. Moderate risk to lender. The lender will likely request more information from the applicant to base their qualifying decision on.
620 or below: The "risky" category. Highest risk to lender. Applicant will probably have trouble obtaining a mortgage loan.
FICO Factors
Your FICO score is based on your credit report (which is your credit history on paper). Your credit report includes such things as:
* Your debt-to-income ratio
* Number of credit cards held
* Credit card balances
* Other outstanding debt
* Payment history
* Payment delinquencies
How to Keep a High FICO Score
There aren't any "quick fixes" when it comes to raising your FICO score. Improving your credit is a gradual, cumulative process. Paying off credit cards will help, but it's best to take a more preventative approach:
Pay your bills on time. Don't apply for credit too often. Minimize your debt (to improve your debt-to-earnings ratio). In other words, keep a clean financial record.
Conclusion
Think of FICO as a little man watching how you handle your finances … peering over his librarian-style glasses and scribbling notes onto a clipboard. Give him good things to write about, and you'll have less to worry about when you apply for a mortgage loan.
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