When purchasing a home, your FICO score truly can make a difference for you. Consisting of five important elements, your FICO score is used to help lenders determine what interest rate you will receive for a mortgage. The higher your FICO score is, the lower your mortgage rate can be with the potential annual mortgage interest savings amounting to well over one thousand dollars. Please keep reading for more detailed information about FICO scores and what you can do to raise your score and save yourself plenty of money.
FICO is an acronym for Fair Isaac Corporation, a company that developed the mathematical formula commonly known as your FICO score. Your FICO score consists of the following five elements:
- Your credit used
- Your new credit
- Your personal credit history length
- Your current debt
- Your payment history
The greatest weight in determining a FICO score is given to your payment history and current outstanding debt. The higher your score the lower your monthly mortgage payment can be as a higher FICO score is a clear signal to mortgage lenders that you are likely to repay your loan and are, therefore, the type of customer that is worthy of receiving a better mortgage interest rate. The less that a risk is perceived, the lower your interest rate will be. Your FICO score is essentially a credit risk determinant score.
FICO scores are developed in conjunction with your personal credit report. Three major credit reporting agencies Experian, Trans Union, and Equifax each keep credit reports on you and tabulate their own FICO scores. A mortgage lender may pull all three credit reports and order your FICO scores from each credit reporting agency when you apply for a mortgage. Typically, the lender will add up the three scores and divide that number by three to come up with a balanced score. They will then use that new number to determine what your mortgage interest rate will be.
Before you purchase a home, it is strongly advised that you obtain copies of your credit reports from the three major credit reporting agencies to verify if there are mistakes on your report or if there is another issue listed that you should resolve first. Errors and previous marks against you can adversely impact your credit report. Your FICO score is based on the results of your credit report so it is imperative that you take the appropriate action to raise your credit standing before applying for any type of loan including a mortgage. Thanks to an act of Congress, you can now get free copies of your credit report, but only through the following web site: www.annualcreditreport.com. It is advisable that you order your FICO scores at the same time fees for this extra service are assessed but the charges are nominal.
Once your credit standing has been improved, you are in better shape to apply for a mortgage. Likely, your efforts to improve your credit rating have paid off in the form of higher FICO scores and a lower monthly mortgage payment resulting in big savings for you!
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