One of the cornerstones of the home buying process is the home mortgage. Whether or not you receive a loan chiefly depends on your employment history, how much you earn, how much you owe, how much you own, and your FICO score. As experienced Realtors who work hard to get people into home ownership, we find that of all of these lending variables the FICO score is least understood. Since your FICO score has the greatest impact on how much your loan is going to cost, we thought we would share a little about what we know.
FICO was created in 1987 as a way to quickly address creditworthi-ness at a time of tremendous credit expansion. The information FI-CO uses comes from three national bureaus that gather credit in-formation: Experian, Equifax, and TransUnion. The FICO score is based on a proprietary algorithmic scoring model that computes scores on a scale from 300 to 850. Your FICO score is used by lend-ing institutions to determine a risk premium. The higher your score, the lower the risk and therefore the lower the risk premium.
Maintaining a high FICO score directly translates into loans that cost you less. For example, if you have a FICO score of 720 and you took out a mortgage on a $250,000 home at an interest rate of 4.5 percent over the life of a 30-year mortgage, you would pay back $456,018. If your FICO score was 600 or lower, you could be charged a rate of 6.5 percent. Over the life of the same loan you would end up paying back $568,862, a difference of almost $113,000.
The Great Recession created a double whammy in the lending in-dustry. Due to increased defaults on mortgages, new government regulations require higher FICO scores and an exhaustive amount of paperwork to secure a mortgage. In 2006 the average FICO score was 723 and in 2019, it was 695. Most home values have recovered significantly from the recession; however, many folks find that their credit scores have not. While the ability to obtain a mortgage is far better than it was 10 years ago, due to the decline in FICO scores, more home buyers will pay slightly more in interest on their tradi-tional 30 year mortgages.
If you, your children, or anyone else you care about has a low FICO score, now is the time to improve it. You may want to consider cre-ating a FICO plan with a credit counselor to help guide your credit habits and maximize your FICO score. FICO is like Google in that they keep their business methods secret but we know that they gather information from five categories: payment history, length of credit history, types of credit, new credit, and debts owed. Negative information is typically captured in your payment history, which makes up 35 percent of the total score.
According to Integrated Loan Assistance, a company that helps repair credit, 79 percent of all credit reports contain errors and out of that, 25 percent contain serious errors that would deny credit. Due to the increasing importance of credit ratings, the Fair and Ac-curate Credit Transaction Act was created allowing US residents to obtain an annual credit report for free. It’s well worth your time to examine your credit and remove any incorrect or erroneous data.
It’s not about how much you make, it’s about how you spend. Mi-chael Jackson, the King of Pop, earned over 2 billion dollars in his lifetime (plus 1 billion posthumously) which may not sound surpris-ing, but what most people don’t know is that in 2007 he had a FICO score of only 563. Not too thrilling to the eyes of a loan officer since that probably wouldn’t qualify for a loan today. The best interest rates live in the land above 720, so if you’re not already there then review your credit habits or work with a credit counselor to get that score up.
Roger and Melissa are longtime Realtors serving both buyers and sellers. Melissa is a past president of the Santa Fe Association of Realtors and Roger is currently serving as the first vice president. They can be reached at 505-699-3112 or firstname.lastname@example.org or visit them online at carsonandcarson.com