When reviewing mortgage applications the information lenders look for first and count on the most heavily is the applicants FICO score. This score is what a loan officer uses in deciding how credit worthy an applicant is. It also has great influence over the terms offered with a loan. Lenders look for a high FICO score because they know that higher scores generally mean less risk for them. Low-risk applicants can count on better rates and loan terms.
How a FICO score is calculated is a proprietary industry secret held in the strictest confidence. However, the FICO corporation has made available a general outline of what information they use in the credit scoring process. Knowing what makes up a FICO score empowers consumers to raise their scores by handling credit appropriately. Here is a list of the factors used in calculating a FICO score, including how important each kind of information is to the formula:
Payment History: This data carries the most weight in the analysis. It makes up 35% of ones score. This is information about a persons payment history, whether it has been on time or not. Scores are lowered for slow payments.
Credit Used and Available Credit: This is an important ratio to a lender and it makes up 30% of your FICO score. Having plenty of available credit will raise your score. Also, paying down loans regularly but not closing them, and paying down your open revolving credit cards will increase the score. However, closing revolving credit accounts will lower the score.
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Types of Credit and Recent Credit Inquiries: These two factors make up the last 20% of your score, or 10% each. There are different kinds of credit available to consumers and FICO looks at how an individual has handled these. If there are different kinds of credit that has been handled successfully then it raises the score. The number of recent credit inquiries can give a picture of a persons current financial situation. If there are a lot of inquiries into someones credit the score will go down.
Knowing these factors and their relative weights can help the potential borrower modify their behavior in order to get a higher FICO score and hopefully more favorable terms for their loans.
Wendy Polisi is the Vice-President of Finance the Dream which offers Rent to Own Houses and Lease Options throughout the United States. To find out more about how they can help you get into your dream home, please visit them at financethedream.com. To learn more about Improving Credit Score, please visit her blog.