What is a FICO® Score?

A FICO® Score is a credit score developed by Fair Isaac & Company and used by Experian, one of the major credit bureaus. It evaluates a person's complete credit profile and assigns a score, which is used by lenders to assess creditworthiness. Each of the three major credit bureaus (Experian, TransUnion, Equifax) has its own scoring system, so individuals typically have three separate scores. A higher score indicates better creditworthiness and lower risk for lenders.

The specific score needed for a home loan can vary depending on the loan program. Most lenders will consider the average of all three scores when evaluating an application. Niche loans and low down payment loans may have higher FICO® score requirements.

The FICO® model considers five main elements in determining a score:

1. Past payment history (about 35% of score): The frequency and recency of late payments impact the score. Recent late payments have a greater negative effect than older ones.
2. Credit utilization (about 30% of score): Maintaining low balances across multiple credit cards is better than having high balances concentrated on a few cards. Closing accounts can potentially harm the score, so it's important to be cautious when doing so.
3. Length of credit history (15% of score): Longer account histories generally have a positive impact on the score. Opening new accounts and closing seasoned accounts can lower the score.
4. Types of credit used (10% of score): Different types of credit accounts (e.g., bank accounts, department store accounts) impact the score differently.
5. Inquiries (10% of score): Multiple inquiries within a short period, such as when applying for multiple credit cards, can be viewed as a risk. However, multiple inquiries for mortgages or car loans within a 14-day period are typically treated as a single inquiry.

To raise your score, corrections to items on your credit report must be made directly with the creditor and confirmed in writing to the credit bureaus. It's advisable to address any issues with your credit before applying for a home loan to ensure accuracy.

Before beginning the homebuying process, it's important to have your credit reviewed and work with a professional loan officer to ensure your loan application is based on accurate information. This can help you secure the best terms and rates for your mortgage.