Buying a home is an exciting time, however the mortgage process can be stressful. One of the top worries for homebuyers is your FICO credit score and how it will impact your financing options. In this article, I wanted to take a look at how FICO credit scores can impact your mortgage and share some tips that help you boost your score to help get your mortgage application approved!
What is FICO and How Does it Affect a Mortgage?
FICO stands for Fair Isaac Corporation and is the leading credit scoring organization in the United States. They are widely used by lenders to determine the level of risk each applicant is. The FICO credit score takes information from all three of the major credit bureaus (TransUnion, Equifax, and Experian) and then gives you a score between 300 on the low side and 850 on the high side. In this ranking, the higher the score you have, the lower the risk you are when it comes to credit. Higher scores will afford you a lower interest rate and save you thousands of dollars over the term of a typical 30-year mortgage. In order to get a mortgage, typically banks are looking for scores above 620 as an absolute minimum. Applicants with scores lower than 620 will have a difficult time obtaining a mortgage and when they do, their interest rate will be higher and may price them out of the home they want.
What Can I Do to Increase My FICO Credit Score?
I always encourage applicants to first get a free credit report from many of the available sources like CreditKarma.com. After obtaining your credit report you find your score is low, there are a few things that you can do to increase your score prior to applying for a mortgage. Many times, there are mistakes on your credit report like duplicate accounts or old items that should not be on the credit report. You can file a dispute with the respective credit bureaus to challenge the validity of these items and get them removed. Keep in mind that it will take up to two months for your score to adjust after removing invalid accounts. The other thing you need to do is ensure that you have NO active collections on your report. If you do, you need to pay them off prior to applying for a mortgage and make sure you get a confirmation from the company that your debt is paid in full. Wait about a month and then get another credit report to verify that the accounts are showing paid in full or have been removed.