FICO - The First Step to Home Buying
Choosing a lender isn't the first step in becoming a homeowner. In reality, the home buying process starts and ends with your finances. To propel your dreams of homeownership forward, considering your credit score is a must along with the type of lender for which you'll qualify in Austin.
The Fair Isaac Company calculates your FICO score on the summary of your total credit history. Most people usually have a score of 600, but scores range from 300 to 850. Since we've experienced an economic downturn, however, some people have seen their score drop by hundreds of points because of underemployment, closed credit card accounts, or credit card accounts terminated because the card didn't carry a high balance. Some of the factors in deciding your FICO score include:
- Credit to Debt Ratio — How much do you owe versus your available credit?
- Credit Inquiries — How many times has your credit history been accessed by someone other than you?
- Types of Credit — Do you have a healthy mix of credit cards and loans?
- Payment History — Do you pay your bills on time every month?
When you pull your credit report, you'll find that you actually have three reports. Experian, Equifax and TransUnion — three of the major credit reporting agencies — use a slightly different models to determine your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. You have a credit score with all three of the bureaus.
Lenders want to make sure that allowing you a loan isn't a risk for them. Your FICO score gives lenders an insight into what type of borrower you'd be solely because of your credit history. Because of the shift in the economy, most home buyers should have scores in the range of 740 or higher to get an acceptable 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 with a superior credit score.
Improving your credit is the first step in buying a home. Call us at 512-834-1600 and we can help you get on the right track to the home of your dreams.
How do you boost your credit score? Building your FICO score takes time. It can be difficult to make a significant change in your credit score with small changes, but your score can improve in a few years by keeping tabs your credit report and by using credit extended to you to raise your score, instead of ruin it. The most important thing is to know your FICO score. You'll improve your credit score by using these helpful hints:
- Apply for gas station cards or retail credit. For those who have no credit or low credit, department store credit cards and gas credit cards are ways to repair credit, increase your spending limits and keep up your payments, which will raise your FICO score. You should always avoid maintaining a high balance for too long because these types of cards more than likely have a steeper interest rate.
- Don't let your cards get dusty. Whether you're just getting started with credit, or if you've got older cards, be sure to use your cards to make sure your accounts stay active. But, be sure to pay them off in no more than two or three payments.
- Keep up with payments. How often you're late with payments greatly affects your credit score. It's one of the reasons people who have recently been unemployed see the biggest dip in their credit score. Yes, it takes longer to rebuild your credit with payment history, but it's the surest way to prove that you're able to make payments to a bank.
- Ensure that your credit history is correct. If you discover mistakes on your credit report, contact 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 give extra care 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 maxed out and have the rest of your cards at a zero balance. It's better to have each of your cards at an even balance than to have all of your debt transferred to a single card.
Knowing the ways you can raise your credit score, you can move toward becoming a homeowner. Know that when you're ready to apply for a loan to purchase a home, you'll want to keep your lender applications within a two-week window to avoid damaging your credit score. With the help of John Horton Realty, the loan application process is sure to go more smoothly so you, too, can become a homeowner.
Learn more about FICO scores at myFICO.com, Fair Isaac's informational site and you can review all of your credit reports for free each year 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.