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Credit Score, It’s Importance, and How It Is Determined in 2018!

There are many factors used to determine your ability to obtain financing for a home. Income, employment stability, and FICO credit score are three of these factors. In today’s article, we will discuss ways to improve your FICO and why it is important.

How important is your credit score when obtaining a mortgage?

“Credit scores are enormously influential in the mortgage process and they have been since the [Federal Housing Finance Agency] essentially forced the mortgage world to start using them in the late 90s,” says John Ulzheimer, author of “The Smart Consumer’s Guide to Good Credit.”

Although credit scores range from 300-850, 850 being those with the highest creditworthiness and 300 being those with the lowest creditworthiness, the credit score range to qualify for a mortgage and to qualify for the lowest interest rates depend on your lender and product.

The most obvious affect your credit score has in the home buying process is in your ability to qualify for a mortgage. All lenders and mortgage brokers have minimum FICO score requirements and without the right score, most lenders have their hands tied are unable to offer you products of any type.

A lesser known effect of your FICO, but a supremely significant effect, is that on the mortgage rate. For most people, determining the affordability of a home comes down to the monthly mortgage payment. While you may not realize it, just a few points one way or the other on your FICO score can increase or decrease the interest rate by a percentage point or two and in turn, the monthly payment.

Look at this example:

A $250,000 loan amount at a mortgage rate of 4% over the standard 30-year term, disregarding all other factors such as property tax and insurance, would make your monthly payments $1,194.00, with a total cost of $429,674.

A $250,000 loan at an increased mortgage rate of just 1% over the standard 30-year term, would make your monthly payments $1,342.00, with a total cost of $483,139.

The same amount borrowed, for the same amount of time, and $53,465 extra paid.

How is your FICO credit score determined?

There are 5 factors that determine your credit score and they all affect your score differently.

  • Payment History: 35% of your score
  • Credit Utilization: 30%
  • Length of Credit History: 15%
  • Credit Mix: 10%
  • New Credit: 10%

Tune in next blog to see what you can do to work on each of these factors!

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