If you’re in the market for a mortgage, you may have heard the term FICO score thrown around. But what exactly is a FICO score, and why does it matter when it comes to getting a mortgage? In this article, we’ll take a closer look at FICO scores and how they are used by mortgage lenders.
What Is a FICO Score?
A FICO score is a credit score created by the Fair Isaac Corporation. It is used by lenders to determine your creditworthiness – that is, how likely you are to repay a loan. FICO scores range from 300 to 850, with higher scores indicating better creditworthiness.
There are three major credit bureaus that calculate FICO scores: Equifax, Experian, and TransUnion. Each bureau may have slightly different information about your credit history, so your FICO score may vary slightly depending on which bureau’s score is used.
Why Do Mortgage Lenders Care About FICO Scores?
Mortgage lenders use FICO scores as a way to assess the risk of lending money to a borrower. A higher FICO score indicates that a borrower is more likely to repay the loan on time and in full, while a lower score indicates a higher risk of default.
When you apply for a mortgage, the lender will look at your FICO score along with other factors such as your income, debt-to-income ratio, and employment history to determine whether or not to approve your loan application. A higher FICO score can help you qualify for lower interest rates and better loan terms.
What FICO Score Do Mortgage Lenders Use?
There are many different types of FICO scores, each tailored to a specific type of loan or credit product. When it comes to mortgages, most lenders use the FICO Score 8, which is the most widely used version of the FICO score.
The FICO Score 8 is calculated using the following factors:
- 35% payment history
- 30% amount owed
- 15% length of credit history
- 10% new credit
- 10% credit mix
This means that your payment history and the amount you owe on your debts are the two most important factors in determining your FICO score.
What FICO Score Do You Need to Qualify for a Mortgage?
There is no one-size-fits-all answer to this question, as different lenders may have different requirements for FICO scores. However, in general, a FICO score of 620 or higher is considered good enough to qualify for a mortgage.
Keep in mind that even if you have a lower FICO score, you may still be able to qualify for a mortgage. Some lenders offer loans specifically designed for borrowers with lower credit scores, although these loans may come with higher interest rates and fees.
How Can You Improve Your FICO Score?
If your FICO score is lower than you’d like it to be, there are several things you can do to improve it:
- Pay your bills on time
- Reduce your debt-to-income ratio
- Keep your credit card balances low
- Avoid opening new credit accounts unnecessarily
- Check your credit report regularly for errors
Improving your FICO score can take time, but it is possible with persistence and patience.
Conclusion
FICO scores are an important factor in getting approved for a mortgage. Mortgage lenders use these scores to assess the risk of lending money to borrowers and to determine loan terms and interest rates. While there is no one-size-fits-all answer to the question of what FICO score you need to qualify for a mortgage, a score of 620 or higher is generally considered good enough. By understanding how FICO scores work and taking steps to improve your score, you can increase your chances of getting approved for a mortgage and getting the best loan terms possible.