Whether you are or have ever been in the market to buy a new home or simply trying to refinance an existing mortgage, one thing is for certain: you have heard the term FICO and/or Credit Score more than once throughout the process. But do you know what these numbers actually mean? Has anyone explained to you who and what FICO is, beyond a number that can alter your life?
FICO, Fair, Isaac and Company, is just one (the most popular) of the scoring models within the mortgage world designed to make the home loan process easier for the lenders by placing a "score" on applicants. Basically, this score tells a lender how likely you are to pay your bills on time by calculating together all aspects of your credit history and current financial activities to arrive at a number between 350 and 850- your credit or FICO score. The higher the number, the better loan opportunities and rates you'll be qualifying for. Therefore, someone with a FICO score of 820 will qualify for a much better program than someone with a 670 score.
The "cutoff" score is 620- This is the number that separates the good scores from the bad. Any mortgage granted for someone with a FICO score of 619 or below is considered a higher risk than those with a score of 620 or above. The "less than 619 mortgage market" is referred to as the "Subprime Lending Market", an area full of predatory lenders, higher rates and some ridiculously high fees.
That part is relatively simple, but what about the formula for calculating the actual score?
The basis and calculations of FICO scores has been shrouded with mystery since its inception, mostly due to the rise of competition. Once Fair and Isaac could prove that the scoring would work, it would only be a matter of time before other scoring models came into existence and took over (The Beacon Score, for example), leaving the originators left out in the cold.
Here's the latest breakdown used by the credit bureaus to calculate your FICO score:
- 35% is based upon the payment histories with all of your creditors (with recent accounts weighted a bit more than past ones).
- 30% is the amount of debt you owe.
- 15% is determined by the amount of time you've utilized your credit (longer credit with on-time payments is better.)
- 10% is based on the number of inquiries into your credit history (how may loans or lines of credit you've applied for), plus the most recent history of all bills.
- 10% is the mix of your credit0 installment loans (car, personal loans), revolving credit (credit cards), and other – (mortgages and leases).
Brock Hayslip recommends that you visit http://www.equifax.com for more information on
FICO Score.
