What’s in a credit score?

In 1956 when they founded the Fair Isaac Company (FICO ), I wonder if engineer Bill Fair and mathematician Earl Isaac predicted that credit scores would be widely used in applications beyond consumer loans?  Today, with credit information easily available, employers, landlords, insurance companies and government agencies are also known to use the scores to determine job worthiness, rental risk and loss mitigation. Data mining is another large market for credit bureaus.

Clearly it pays to understand your FICO score, especially if you are applying for your first mortgage. With credit scores at historic lows,  lenders have tightened qualifications. So be proactive and learn about the credit reporting process to head off any last minute surprises during escrow that could derail your home ownership plans.

Below is a run-down of the most important aspects of your credit score when financing a home purchase:

  1. It is a myth that shopping around for a mortgage loan will decrease your credit score. In fact, credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
  2. A credit report is actually an amalgam of scores from different credit bureaus which have been evaluated using a formula or model. The FICO score is the best known and most widely used of these models. So be careful when researching on your own and using credit service web sites. Not all credit reports reflect a complete picture of your credit worthiness.
  3. Your FICO score is calculated from five basic categories in your credit report: Payment history, 35%; Amounts owed, 30%; Length of credit history, 15%; New credit, 10%; Types of credit, 10%.
  4. Lenders use minimum thresholds to determine eligibility for their products. For example, a score under 600 is considered high risk. 650 is widely considered to be average. Scores of 690 to 700 are deemed excellent and qualify such borrowers for the best rates. Interest rates depend on these thresholds, and they are exact. Missing a threshold by even a point can cost you.
  5. Mistakes happen–yours and the credit bureau’s. Whether you’re disputing a spurious ding on your report or cleaning up your own past errors, fixes take time. Present your credit history in its best possible light by checking your score with a qualified loan officer as part of a pre-approval loan application before the escrow clock starts ticking.

The bottom line?  Don’t fool around with your credit score when preparing for first-time home ownership. Call your trusted mortgage broker as soon as possible. Pulling a credit report is the first step in pre-qualifying for a mortgage, and allowing plenty of time to fix credit issues can save you lots of money over the life of a home loan. There is no threat to your credit score to shop around, nor are there fees associated with the loan application process. Because she has access to lender guidelines for the loan products that best suit your situation, your loan officer is the most qualified person to help you evaluate your credit score.

Contact me if you’d like to know more about credit scores and home ownership. I’m happy to answer questions about this important first step in the loan process.