Increasing Your FICO Score for Home Ownership
Choosing a lender isn't the first step in becoming a homeowner. In reality, the home buying process starts with your finances. Saving your money for a down payment is a good idea, but if you don't have an acceptable credit score to reinforce it, you could end up renting longer than you expected in Newburgh, New York until your FICO score is acceptable.
A FICO score is a collection of your years of credit history based on a model developed by Fair Isaac and Company. The score ranges from 300 to 850, with most people traditionally having a score of 650. Since we've experienced an economic downturn, however, some borrowers have seen their score drop dramatically after loss of employment, charged off credit card accounts, or credit card accounts closed by the lender due to inactivity. Some of the pieces in calculating your FICO score include:
- Credit Inquiries — Do you have too many open accounts?
- Types of Credit — Do you have a healthy mix of credit cards and loans?
- Payment History — How many late payments have you made?
- Credit to Debt Ratio — How much do you owe versus how much credit you have available?
When you pull your credit report, you'll see that you actually have three reports. Experian, Equifax and TransUnion — three of the major credit reporting agencies — use a slightly different systems to calculate your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. Because of this, you have three scores, one for each scoring model.
When you apply for a mortgage or any other loan, lenders want to make sure that extending a loan to you isn't a risk. Your credit score gives lenders an insight into what type of borrower you'd be based solely on your credit history. You'll need a score of at least 700 to get a satisfactory interest rate. If your score is lower, you can still qualify for a loan, but the interest paid over time could be more than double that of someone having a stronger FICO score.
We're used to working with all levels of credit history. Contact us and we can help you get on the right track to the home of your dreams.
There are ways to raise your score. Improving your FICO score takes time. It can be difficult to make a significant stride change in your credit score with quick fixes, but your score can improve in a year by monitoring your credit report and by using your credit wisely. The most important thing is to know your FICO score. Here are some methods to improve your credit score:
- Apply for gas station cards or store credit. For those who have non-existent credit or less-than-stellar credit, chain store credit cards and gas credit cards are ways to get credit, increase your spending limits and have a solid payment history, which will raise your FICO score. You should always beware of carrying a high balance for more than a couple of months because these types of cards more than likely have a higher interest rate.
- Keep your cards active. Whether you're just getting started with credit, or if you've got older cards, use your cards so that your accounts stay active. But, be sure to pay them off in one or two payments.
- Stay on top of payments. How often you're late with payments greatly affects your credit score. It's one of the reasons people who have recently experienced job loss see the biggest dip in their credit score. Yes, it takes longer to restore your credit this way, but it's the most reliable way to show that you're responsible enough to make payments to a lender.
- Correct your credit report. If you discover incorrect items on your credit report, write to the bureau requesting that the item be removed. If you have a common name or the same name as a family member, you'll want to pay extra attention to make sure the activity reported is correct.
- Spread your debt around. At first, this doesn't sound like a good idea. But, you don't want to have one card that is holding the maximum and have the rest of your cards at a zero balance. It's better to have each of your cards at a smaller balance than to have the most of your debt transferred to a single card.
Knowing the ways you can improve your credit score, you can move toward becoming a homeowner. Know that when you're ready to apply for a loan to purchase a house, you'll want to keep your lender applications within a two-week window to avoid adverse effects on your credit score. With the help of Countryman Real Estate Associates, the loan application process can be a stress-free experience so you, too, can achieve home ownership.
Learn more about FICO scores at myFICO.com, Fair Isaac's informational site and review your credit history for free at annualcreditreport.com. And, for a small payment, you can get your FICO score from each bureau on their websites: equifax.com, experian.com and transunion.com.