The Importance of your FICO (credit) Score

Getting a mortgage for your next home you’re thinking of buying, and then keep your credit scores as high as possible. Credit scores play a large role in deciding what types of mortgages products you qualify for, and especially important, the rate your lender provides you.

Credit Scores?

A person’s history is the best way to predict a person’s behavior in the future, so lenders also look at a person’s financial behavior in the recent past. Lenders apply this theory to consumer credit also. Someone who pays their bills on-time should continue to pay bills on-time in the future.

And that is the basis of credit scoring (i.e., using your past behavior to predict future behavior).

To most mortgage lenders, your credit score represents your likelihood of making on-time mortgage payments for the next 90 days. “90 days” matters because, after 90 days without payments, a homeowner falls into default.

Higher credit scores correlate with lower default risk which explains why people with high credit scores tend to receive lower mortgage rates than people with low credit scores. Rightly, those with the lowest risks get to pay the lowest rates.

Mortgage Lenders Use The FICO Scoring Model

In the United States, there are three main credit bureaus: Equifax, Experian and TransUnion. But none of these are particularly relevant in the home-buying process, because the nation’s mortgage lenders rely on a different credit model, the FICO model. FICO is named for the Fair Isaac Corporation. FICO scores range from 300-850.

Credit Scores Change Mortgage Rates

FICO scores influence the mortgage rate for which you might be eligible. In response to major mortgage market losses, in April 2008, both Fannie Mae and Freddie Mac introduced something called Loan-Level Pricing Adjustments (LLPA). Loan-level pricing adjustments are discount points added to a mortgage rate, based on a borrower’s potential risk to a lender.

A discount point is a loan fee, paid at the time of closing. One discount point is equal to 1 percent of your loan size.

For Example

 740+ FICO  : There are no discount points required. This loan is “low risk”.

720-739 FICO :  0.250 discount points are charged to the borrower, or $250 per $100,000 borrowed

700-719 FICO :  0.750 discount points are charged to the borrower, or $750 per $100,000 borrowed

680-699 FICO :  1.500 discount points are charged to the borrower, or $1,500 per $100,000 borrowed

660-679 FICO :  2.500 discount points are charged to the borrower, or $2,500 per $100,000 borrowed

Credit Score can be improved

If your credit score is not where you would like it to be, there is good news, you can take steps to raise it.

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