What is a FICO® Score?
FICO® stands for Fair Isaac Corporation (formerly Fair Isaac & Company) and is the most well-known credit scoring system used by primary credit bureaus (Experian, TransUnion, and Equifax). The credit bureau’s software evaluates a complete credit profile and assigns a three-digit score to estimate creditworthiness. Because each bureau employs its own scoring system and may hold slightly different data, a person will usually have three separate scores. Someone with a higher score is viewed as a lower financial risk. Base FICO® scores range from 300 to 850, with scores above 670 generally considered "good".
What Kind of Score Do I Need for a Home Loan?
There are as many answers to this question as there are loan programs available. Most lenders evaluate an application using the median (middle) score of all three credit reports. Niche loans, such as Easy Qualifier or low-down-payment options, typically carry higher FICO® requirements, whereas government-backed loans (such as FHA or VA) often accommodate lower minimums.
How is My Score Determined?
The FICO® model is calculated using five core elements:
1. Past payment history (35% of score): The fewer the late payments, the better. Recent late payments have a much greater negative impact than an older bankruptcy followed by a clean payment history.
* Myth: Paying off accounts with recent late payments will erase the late marks. Payoffs update balances but do not alter payment history.
2. Credit utilization / Amounts owed (30% of score): Low balances spread across several cards result in a better score than the same total balance concentrated on a few cards near their limits. While holding too many cards can lower a score, closing existing accounts can do more harm than good by reducing available credit. Exercise caution when closing credit accounts.
3. Length of credit history (15% of score): The longer accounts have been established, the better. Opening new accounts or closing long-standing, seasoned accounts can significantly reduce the average account age and lower the score.
4. Types of credit used / Credit mix (10% of score): Finance company accounts score lower than traditional revolving credit lines like bank or department store credit cards.
5. New credit / Inquiries (10% of score): Multiple credit card applications can signal risk, especially if existing accounts are near their limits. However, multiple mortgage or auto loan inquiries within a typical 14-to-45-day rate-shopping window are counted as a single hard inquiry to protect rate-shopping consumers.
How Can I Raise My Score?
Your score can only be updated when changes are reported directly to the major credit bureaus (Experian, TransUnion, Equifax). Formal documentation or written confirmation from creditors is generally required to correct inaccuracies. It is best to resolve discrepancies well before applying for a home purchase, as it is difficult to predict the exact numerical impact a single change will have.
What Does This Mean to Me?
Have your credit reviewed by a professional loan officer before searching for a home to ensure your mortgage application relies on the most accurate credit profile possible.
