Whenever you apply for a loan, regardless of what it is for, your bank or financial institution must determine if you are a good risk. What this means is that your lending institution will be looking at your ability to pay the loan back. It might not be too difficult to get a small loan for a new piece of furniture, such as sofa, that will be paid off in two to three years. However, when it comes to a mortgage for a new home we are talking about a major commitment of 20 or 30 years. The financial lending institution will be looking at your credit history, as well as your general financial standing. They will be very interested in your ability to pay your monthly mortgage payments on time
FICO scores
The financial institution often uses a FICO score, which is a predetermined score given out by the three credit rating companies: Equifax, TransUnion and Experian. The lending institutions will get a score for each of these credit rating companies.
Your FICO score is extremely important. Not only will it determine if you will be given a mortgage, it will affect how much you will be allowed to borrow, the interest rates charged, monthly payment on the mortgage loan, and how long it will take for you to pay the loan. The lower your FICO score, the higher your interest rates will be.
Does everyone have a FICO score?
Not everyone will have a FICO score. For example, if you have never had credit you will not have a FICO score. Therefore, you would need to establish credit, so that you can obtain your score, before the banks or other lending institutions will consider giving you a mortgage loan. You will also have to make sure that you have a FICO score established with each of the three credit ratings companies and that
1- You have established credit for six months or more
2- Your credit score has been updated every six months.
The FICO score is generated by software from a company called Fair Isaac and Company hence the acronym FICO. FICO scores will be known by different names;
Equifax® – Beacon Score
TransUnion – EMPIRICA®
Experian – Experian/Fair Isaac Risk Model
FICO scores are just one determinant for mortgages, the bank or other lending institutions will decide their own strategy for accepting new loans. What can be said is that the higher the FICO score the better the chances of getting not only a mortgage; but getting a good mortgage with a lower interest rate.
What is a good FICO score?
FICO scores can be anywhere from 300-850. Though there is no particular score that determines whether a mortgage will be accepted, as a rule of thumb banks are looking for FICO scores of 740 and higher. Sub-prime mortgages will accept in the 600 range.
FICO scores are not the same across the three reporting agencies. FICO scores determined by the financial information obtained by each of the credit rating companies, and that information can differ.
Furthermore, it is to note that there are other credit reporting scores that financial lending institutions may use and the evaluation system may be different. For example, the higher the score, might mean a poor credit history and therefore a higher risk for the financial institution.
What information is analyzed to determine a FICO score?
Payment history
Your payment history includes, the types of credit you have such as credit cards, personal loans, bank loans, department store accounts, mortgages, even little things such as magazine subscriptions.
The credit bureaus also watch if your payments are up to date, and if not how long have they been delinquent. They will check if you have any bankruptcies, liens, accounts in collection and of course how long any of these accounts have been left unpaid. They will look at how much money is still owing on all your credit accounts. They will look at the number of the accounts in default of payment and the number of accounts that are in good standing.
Your credit history will also take into account how many creditors you have, even when these accounts are in good standing. The credit rating bureaus will look at your lines of credit. This information is important especially in determining if your income surpasses your existing loans. In other words even if your credit is outstanding, if you are pushed to the limit with debt, you may not be eligible for a mortgage. These bureaus will also look at the balances on your existing loans, and how long you still have to pay on them.
To determine your FICO score, the analysis will examine the length of time you have had credit from new accounts to longstanding accounts. Your FICO score will also take into account the types of accounts that were opened. It will look at if any past credit issues that have been resolved. Another important aspect for the payment history is the number of credit inquires that have been made.
You can improve your FICO score and when you do, you can reapply for a better mortgage with better rates.
Individuals interested in buying a new home or other property, should make sure they have a high FICO score. This means they should be paying all their bills on time, they should limit the amount of credit inquires upon their credit history, and avoid applying for new credit lines since all these things may result in a lower FICO score. Contact the Canseco Group for further information on how to improve your FICO scores. www.canseco.com
SOCIAL