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This BLOG will help you understand everything about Credit Scores and how that is helpful when buying a home. Some of the topics that will be covered are items like what makes your Credit Score high, what’s in my FICO Score, what is a good FICO score, and so much more. However, before we dive into some of these more profound questions, we first need to understand Cedit Score and the Scoring Models.
Table of Contents:
Back Story Scoring Models
Understanding FICO and VantageScore
What Makes your Credit Score High
What’s in my FICO Scores?
What are Lenders Looking for in a Credit Score?
What is a Good FICO Score?
Back Story Scoring Models:
A credit score is just a representation of your creditworthiness. Or another way of looking at it, your potential to default on the new credit. The higher the score, the more apt a creditor is willing to extend credit. Your credit score is not a complete picture of your overall financial health. Credit scores do not look at your income, employment history, or savings. Instead, your credit score is just evaluating how you handle credit."The higher the score, the more apt a creditor is willing to extend credit" Click To Tweet
But, just to prove that credit scoring is a complicated matter, there are several versions of a credit score and several models inside each of those versions. Not only are there different models and versions, these models and versions are offered by three different repositories. The three repositories, known as bureaus, are Experian, Equifax and TransUnion. So, let’s talk about the two major versions of credit scoring.
Understanding FICO and VantageScore:
The longest-running credit scoring model is FICO, which stands for the Fair Isaac Company. The FICO score has been around since 1989. It is the model that mortgage lenders use. FICO scores range from 300 to 850 by evaluating data from 5 key areas. FICO will most heavily look at your payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts. Inside of the FICO scoring options are various models. The mortgage market, being incredibly conservative, uses models 2, 4 & 5, while FICO’s newest model is FICO 10. The older models have a longer track record, so the score can be more readily applied to risk assessment.
In 2006, the three major credit bureaus banded together to provide competition for the FICO scoring model and rolled out the VantageScore. Under VantageScore 1.0 and 2.0 the scoring range was 501 to 990. While this scoring range certainly created a bit of differentiation from the FICO score, it also created some confusion when comparing the FICO and Vantage scores. Currently, the VantageScore 3.0 and 4.0 use the same range as FICO to allow both lenders and people tracking their credit a way to more readily compare scoring models.
So, what does all this mean for the home buyer or borrower? If you are planning on applying for a mortgage, just be aware that the scores the mortgage lenders are using may, and probably will, be different then the scores you may be monitoring through Credit Karma or what your bank’s/credit card FICO tracking offers. And, as mortgage lenders are using the older FICO models, the scoring ranges you may be seeing can be somewhat greater. Remember, all mortgage lenders offering conforming and government insured mortgages will use FICO models 2, 4 & 5. Not the most current models 8 (which is the most popular), 9 or 10. Although the variance in scores should not be great, knowing that there can be a difference in the models is important.
What Makes your Credit Score High:
Now that we have the back story on the scoring models, let’s look at what makes up a good credit score. From FICO’s website, we can see the breakdown of the key areas. Having a deep and long credit history, paying your bills on time, keeping your credit card balances low (as a percentage of your high credit limit), avoiding opening lots of new credit, and having a decent mix of credit types go a long way to having a high credit score. Optimizing your credit and the mix of credit prior to starting the home buying process can be a huge game-changer. If a big part of the mortgage lending process can be characterized as being “all about the score”, getting your credit house in order prior to buying is crucial.
What’s in my FICO Scores?
FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into 5 categories:
1) Payment history (35% weight)
2) Amounts owed (30% weight)
3) Length of credit history (15% weight)
4) New credit (10% weight)
5) Mixed Credit (10% weight)
What are lenders looking for in a credit score?
Knowing what makes up a credit score and the behavior that may impact that score is only part of the story. What are lenders looking for in a credit score? First, we must understand that mortgage lenders concentrate on the middle of the three scores.
In general, to qualify for a conventional mortgage offered by and , a middle score of 620 or higher is needed. There are some changes coming that may offer a blended score but the adoption of this blended score has not been robust. If we look at the government insured options using FHA, RD or VA, the middle score when putting down the minimum amount is 580. Experian has produced some numbers on the ranges of FICO scores. What you see below is that nearly 84% of people would qualify for a government insured loan. Adding in the overlay for some of the down payment assistance programs with credit scores required at 640, we still see that over 70% of people would be eligible based on their credit score.
What is a Good FICO Score?
FICO creates different types of consumer credit scores. There are “base” FICO Scores that the company makes for lenders in multiple industries to use, as well as industry-specific credit scores for credit card issuers and auto lenders.
The base FICO Scores range from 300-850, and FICO defines the “Good” range as 670 to 739. FICO’s industry-specific credit scores have a different range: 200 to 900. However, the middle categories have the same groupings and a “Good” industry-specific FICO Score is still 670 to 739.
Knowing what your credit is plays an important part in many of the services you need. From auto financing to insurance costs to mortgage lending, the higher the score, the cheaper the cost of these services. Monitoring your credit is important. Knowing the ins and outs of what makes up a good score is also important. Optimizing the characteristics of your credit is paramount to attaining homeownership while opening the doors to the best type of financing.