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 with your finances. Putting back your money for a down payment is a good idea, but if you lack an acceptable credit score to reinforce it, you could find yourself renting for another couple of years in Lomita until you improve your score.
A FICO score is a review of your years of credit history based on an instrument developed by Fair Isaac and Company. The score ranges from 300 to 850, with the majority of people normally having a score of 650. Since we've experienced an economic downturn, however, some borrowers have seen their score lowered after loss of employment, closed credit card accounts, or credit card accounts that were closed because they don't carry a balance. Some of the factors in determining your FICO score include:
- Types of Credit — Do you have a healthy mix of credit cards and loans?
- Payment History — Do you pay your bills on time each month?
- 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?
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 systems to calculate your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. As a result, you have three scores, one for each bureau.
Lenders want to ensure that giving 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. 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 accumulated in the long run could be more than double that of an individual with a superior credit score.
We're used to working with all levels of credit history. Call us at (310) 784-8321 and we can help you get on the right track to the home of your dreams.
There are methods to increase your score. Improving your FICO score takes time. It can be hard to make a significant stride change in your number with small changes, but your score can improve in a few years by monitoring your credit report and by wisely using credit. The most important thing is to know your FICO score. Here are some ways you can improve your credit score:
- Apply for service station cards or department store credit. For those who have no credit or below average credit, retail credit cards and gas credit cards are ways to begin your credit history, increase your credit limits and stay on top of your payments, which will raise your FICO score. You must always avoid maintaining a high balance for too long because these types of cards traditionally have a surprisingly high interest rate.
- Don't let your cards get dusty. Whether you have older cards, or are just getting started with credit, use your cards so that your accounts stay active. But, 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 been unemployed see the biggest dip in their credit score. Yes, it takes longer to rebuild your credit this way, but it's the most reliable way to prove that you're able to make payments to a lender.
- Correct your credit report. 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 pay extra attention to make sure the activity reported is correct.
- Even out your debt. At first, this doesn't seem like a good idea. But, you don't want to have one card that is at the limit and have the rest of your cards at a zero balance. It's better to have each of your cards at a lower balance than to have the majority of your debt taking up the balance a single card.
Now that you know more about credit reporting, you'll be able to successfully take the first steps to homeownership, and that is improving your FICO score. Remember that when it's time to apply for a loan to purchase a house, you'll want to keep your credit inquiries within a two-week window to avoid adverse effects on your credit score. With the help of Kivett Realty, the loan process is sure to go more smoothly so you, too, can achieve home ownership.
Get more information by visiting 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.