Choosing a lender isn’t the first step in becoming a homeowner. In reality, the home buying process begins with your finances. Without an above average credit score, buying a house is harder and you could find yourself renting longer than you expected in the Sacramento area until your score improves.
The Fair Isaac Company calculates your FICO score on the summary of your total credit history. The score ranges from 300 to 850, with most people traditionally having a score of 600. In recent years, however, some people have seen their score drop by hundreds of points because of unemployment, delinquent credit card accounts, or credit card accounts terminated because the card didn’t carry a high balance. Some of the pieces in reviewing your FICO score include:
- Types of Credit — Do you have a healthy mix of loans and credit cards?
- Payment History — Do you pay your bills on time every month?
- Credit to Debt Ratio — How much do you owe versus how much credit you have available?
- Credit Inquiries — Do you have too many open accounts?
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 system to calculate your credit rating. FICO is used by Experian, Equifax’s model is called BEACON, and TransUnion uses EMPIRICA. This means you have three scores . . . one for each bureau.
When you apply for a mortgage or any other loan, lenders want to make sure that extending a loan to you isn’t a problem. Your credit score gives lenders insight into what type of borrower you’d be based solely on 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 a satisfactory interest rate. If your score is less than that, you can still qualify for a loan, but the interest accumulated over time could be more than double the amount of someone having a stronger FICO score.
