When you are ready to buy a home your credit score plays a big role in determining what mortgage loan programs you might qualify for, as well as how much you'll pay for mortgage insurance, if you lender requires it. The better a homebuyer's credit risk the more lending opportunities are available to him or her.
FICO Scores are the credit scores used by 90 percent of the top lenders to determine your credit risk, according to Fair Isaac, the company that invented the FICO Score. According to myFICO, the consumer division of FICO, the following are five misconceptions about FICO Scores homebuyers should know about.
Misconception: Only a credit score determines whether or not I get credit.
Fact: Lenders use a number of factors to make mortgage loan decisions, including your FICO Scores. Lenders look at information such as the amount of debt you can reasonably handle given your income, often referred to as debt-to-income ratio; your employment history (typically a minimum two-year employment history in the same career is required); and your credit history, such as amount of credit and length of credit. Based on a perception of this information, as well as specific underwriting policies, lenders may extend credit to you although your score is low, or decline your mortgage application although your score is high.
Misconception: A lousy credit score will haunt me forever.
Fact: In fact, just the opposite is true. A credit score is a “snapshot” of your credit risk at a specific point in time. Your credit score changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you use credit. For example, past credit problems impact your scores less as time passes. Lenders request a current score when you submit a mortgage application, so they have the most recent information available; therefore, by taking the time to improve your credit scores, you can qualify for more favorable loan terms.
Misconception: Credit scoring is not fair to minorities or other groups.
Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included and do not have any impact on your score. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. According to FICO, credit scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.
Misconception: Credit scoring is an invasion of my privacy.
Fact: Credit scoring evaluates the same information lenders already look at, such as the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information – for example, fewer questions on an application form.
Misconception: My credit score will drop if I apply for new credit.
Fact: If it does, it probably won't drop much, according to FICO. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.