Improve your FICO scores and get Better Mortgage Rates

Here’s What You Need to Know to Get a Better Mortgage Rate:

Your FICO credit score is a 3-digit score ranging from 300 to 850.

There are at least 16 different types of FICO scores. FICO 8 and FICO 9 are currently the most common for credit card and auto loans (sometimes the Vantage score…note that Vantage scores aren’t FICO scores). 

FICO 5, FICO 4, and FICO 2 are the most common for mortgage loans.

FICO credit scores frequently change, so it’s a good idea to use a credit monitoring service to watch for changes and possible identity theft.

• • Lenders use your FICO credit score to determine mortgage loan approval and your mortgage rate.

• • Check your FICO scores often on your credit card and bank account sites. Keep in mind those mostly use FICO 8 or FICO 9

• • Consider paying for a credit monitoring service.

• • You’re entitled to a free credit report annually from Experian, Trans Union, and Equifax.

• • Mortgage Credit reports mostly use FICO 5, FICO 4, and FICO 2.

• • Mortgage Lenders typically accept the middle score of the borrowers.

• • Credit Karma doesn’t use FICO scores; their scoring uses a methodology called “Vantage Score.”

• • If you want to raise your scores quickly, then make sure to pay your accounts on time and focus on increasing available credit. Paying off installment loans usually won’t raise your scores. 

• • Paying off credit cards is a better short-term approach.

• • Credit reports often have errors, so dispute anything incorrect on your account information with Experian, Trans Union, and Equifax.

• • You can “freeze” your credit by contacting Experian, Trans Union, and Equifax. Credit freezes can also help you prevent identity theft.

Your FICO credit score is critical in determining whether your mortgage loan application will approve. Here’s what you need to know about your score and how it can affect your loan approval.

What is a FICO score, and how does it affect your mortgage?

A FICO score is a 3-digit number generated by the FICO company (formerly known as “Fair Isaac Co”) that helps lenders assess how much of a credit risk you are. 

Fico scores reflect your personal credit history.  

1) how long you’ve had credit?

2) how much debt do you carry?

3) Have payments been made on time?

4) how many new accounts you’ve recently opened?

5) how often do you apply for new credit?

6) how much credit do you have available?

It’s important to know that your FICO credit score can significantly impact your mortgage interest rate. 

Here are some primary factors that impact your score:

a) timely payment history

b) length of time with open accounts

c) amounts owed across all accounts 

d) the types of loans shown on the credit report 

e) amount of available credit

Will you get a better mortgage rate with a higher FICO score?

Yes, having a higher FICO score typically translates to a better mortgage rate.

FICO scores are one of the primary factors lenders use to evaluate the creditworthiness of a borrower.

A higher FICO score generally indicates a lower risk of default, which makes lenders more likely to offer lower interest rates and better loan terms. In contrast, a lower FICO score may lead to a higher interest rate, which can significantly increase the total cost of the mortgage over time.

Therefore, it’s generally a good idea to try to improve your FICO score before applying for a mortgage, as it can help you secure a more favorable rate and save you money in the long run.

Credit Monitoring and Free Credit Reports: Once a Year Isn’t Enough

An excellent way to monitor your credit before applying for a mortgage is by regularly checking your credit report and subscribing to a credit monitoring service.

You’re entitled to a free credit report from each credit reporting bureau once every year.  

But once a year isn’t enough. Check your scores regularly on your credit card and bank account websites. For a fee, credit monitoring companies provide information to you via email and text anytime anything changes that could impact your credit scores.

Credit Karma does not provide FICO scores.

Credit Karma uses a “non-FICO” score called “Vantage Score” to qualify prospects for credit cards and other loans. 

Don’t rely on a non-FICO score if applying for a mortgage because the scores could be dramatically different (better or worse).

Which FICO scores impact your mortgage rate?

As of this writing, Equifax uses FICO 5, TransUnion uses Fico 4, and Experian uses FICO 2. 

The middle score of the three different scores is the FICO score lenders typically use when reviewing your loan application.

Most credit card issuers and auto loans (as of this writing) use FICO 8 or FICO 9. 

Even though credit scores on your credit card or bank account will differ from mortgage FICO scores, they trend (up or down) similarly to mortgage FICO scores.

Who are the credit agencies?

The three consumer credit reporting agencies are Experian, Trans Union, and Equifax. 

Tips for maintaining a good credit score during the mortgage loan process

Once approved for a mortgage, keep paying your accounts on time. While your mortgage loan is processed, avoid applying for new credit because it could impact your mortgage approval.

Don’t hesitate to challenge any inaccurate information on your credit report. 

Let your mortgage professional know about any errors. They can often get it reviewed quickly by the Credit Agencies who prepared the credit report. 

Never pay a mortgage broker or lender for “credit repair.”

A mortgage broker/lender should never engage in “credit repair” or charge any fees for “credit repair” for a borrower.

What to do if your credit score is low and you’re having trouble getting approved for a loan?

With a low credit score, rates will be higher. Credit might not be available at all.

Here are some tips:

1) Start making payments on time, even if all you can make are minimum payments.

2) Pay down debt as quickly as you can. You’ll see score improvements within a few months with periodic reductions in debt balances on credit cards.

3) Installment loan principal payments have little impact on your FICO credit scores in the short term.

Paying down credit cards will usually help scores rise faster because you’re increasing your “available credit.”

4) Debt consolidation and low-cost balance transfers can sometimes be a benefit.

Paying down your consumer credit debt can quickly raise your credit score. Shopping around for better loan terms and interest rates can help lower the total money you owe.

Summary:

A FICO score is essential to your mortgage loan approval and cost.

There are three types of FICO credit scores for a mortgage. Lenders generally use the middle score when evaluating your application. 

You can improve your chances of getting approved for a loan by monitoring your credit report and taking steps to improve your credit score before you apply. 

Maintain a good credit score after your mortgage loan application approves. Make all of your payments on time and keep your balances low. 

If you have a low credit score and need help getting approved for a loan, there are some things you can do to improve your chances. Direct deposits, automatic payments, and paying down existing debt can help boost your FICO credit score. Shopping around for better loan terms and interest rates can lower the total amount of money you owe. 

Dispute and correct any credit report errors.

Contact Steve Silver at Silver Mortgage, at 1-800-920-5720.

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