Make Your FICO Score Better
are low, but only some mortgage borrowers will access to the lowest rates available.
The secret to low mortgage rates is to carry better-than-average credit. And, even if your current credit scores are low, there are ways to make improvements quickly.
This is because your credit score is based on a system — and the system can be worked.
Now, it’s true that the low-downpayment FHA loan and the 100% loans from and VA loan all give universal access to their lowest available rates regardless of your credit score; you don’t need a 740 FICO score for that.
But, for borrowers using the , the 80/10/10 loan, or any other conventional or jumbo mortgage, having a high credit score is going to improve your rate.
Buying this year or next? Take time to learn about credit scoring, and take steps to improve your FICO.
What Is A Credit Report?
Credit reports are an official record of your financial history, detailing everything from auto loans you’ve taken, to credit card balances you’ve carried, to liens and bankruptcies linked to your name.
Generally, information added to your credit report remains for seven years. In some cases, information is permanent.
The details of your credit report determine your credit rating.
Credit ratings can be based on an Alphabetic System (AAA through F), but many are scored numerically.
In mortgage lending, banks use credit scoring systems which range from 300 at the low-end to 850 at the top-end. A minimum score of 500 is required to get mortgage-approved ().
However, with credit scores above 500, borrowers can get access to lower mortgage rates; to additional loan options; and, to the right to buy a home with little or nothing down.
The benefits of high credit score extend beyond just home loans, too.
For example :
- Insurers often use credit scores to determine premium schedules. Higher scores bring lower premiums.
- Employers often use credit scores to determine whether to hire, promote, or reassign. Higher scores are linked to better outcomes.
- Landlords often use credit scores to determine whether to rent a home or apartment. Higher scores can improve the terms of a lease.
In other words, having a high credit score can be paramount to getting the best rates, to paying the fewest fees, and to realizing the biggest monthly savings that are available to you.
Even better — anyone can raise their credit score to “Excellent”.
This is because credit scores are based on a formula and parts of the formula are well-documented and described.
Want to have a higher credit score? Read on.
Mortgage Lenders Use FICO Scoring Model
There are tens of credit reporting companies. However, in the mortgage world, there are three companies which matter most — Equifax, Experian and TransUnion.
Collectively, these three firms are known as the “major credit bureaus”.
Each of the bureaus sells more than one “credit score” product and, for consumers on their respective websites, it can be a challenge to know exactly which “score” to review.
For persons about to buy a home, the relevant scoring system, by bureau, is as follows:
- For Equifax, it’s the Equifax Beacon 5.0
- For Experian, it’s the Experian/Fair Isaac Risk Model v2
- For TransUnion, it’s the FICO Risk Score 04
These are the relevant scoring systems because, when a mortgage lender “pulls your credit”, it’s pulling your scores for these particular products. Your lender then takes the median of the three scores (i.e. the one in the middle), and calls it your credit score.
For example, if your credit scores are 620,640 and 700, your “score” is 640.
As another example, if your credit scores are 700, 719 and 720, your credit score is 719.
Credit scores are neither rounded up nor averaged.
Additionally, on a joint mortgage application, lenders will use the lower of the two middle credit scores, regardless of which borrower is the “primary wage earner”; or, whether it’s a .
Generically, credit scores are called “FICO scores”, named after the Fair Isaac Co., a pioneer in the credit scoring space. The higher your FICO, the better your mortgage terms, all else equal.
Raise Your Credit Scores, Get Better Mortgage Rates
When a credit bureau prints your credit score, in addition to providing your raw scores, it will typically offer up to four ways by which you can raise your credit score.
The notes can be helpful, ranging from the general (“Balances too high”) to the specific (“Too many inquiries”).
The notes can serve as a roadmap toward improving your FICO. It’s not uncommon for a person to improve their FICO score by 100 points or more with attention to credit-scoring details.
But, for all of the available advice, there are only a few fool-proof ways to make drastic improvements to your credit score.
- Pay your bills on time, always
- Keep your credit card balances low as compared to your total available credit
- Apply for store charge cards only when absolutely necessary
- Pay doctor and utility bills when they’re due
- Keep “aged” credit cards open, and use them periodically
Of particular note is your “Amount Owed”, highlighted in the second point above.
Ideally, a credit card balance should not exceed 30 percent of that card’s available balance. This credit score metric comprises thirty percent of your overall score so, if you’re unable to pay down your debts, consider asking your credit card company to raise your total credit limit.
Raising your limits can be as effective in raising your FICO as paying down your existing balances.
Lastly, if you’ve had a derogatory event on your credit report, such as a , avoid credit repair companies until you’ve done your due diligence. Time is often the best healer of a “bad credit report” — sometimes, much better than settling with a debt collector.
What Are Today’s Mortgage Rates?
As part of the “rate quote process”, lenders will often check a person’s credit score as a complementary service. It can be a terrific way to get access to your credit report without having to pay.
Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.