Why a Good FICO Score is So Crucial to Mortgage Approval
In most cases, purchasing a home means looking for a mortgage. Having a good FICO score is important to get a good interest rate on your mortgage. FICO scores are also important to qualify for a loan in the first place. In uncertain times when the credit markets are tightening, it is crucial that your FICO score is as good as it can be. If your credit is not as good as you would like it to be, you might want to take steps to improve it now, so that you will qualify for a loan when you need it.
What is a FICO Score?
FICO is an acronym that stands for Fair Isaac & Company. This is the company that developed the standard for computing your credit score. A FICO score ranges from 300 to 850. The FICO score has evolved and changed over the years, but it generally reflects your payment history, the amounts that you owe, the length of your credit history, type of credit that you use, and new credit that you take out. Your FICO score can also be lowered if you have too many inquiries. Your FICO score is used by lenders to determine whether to loan you money, and at what rate.
Low FICO Scores Could Mean Mortgage Rejection
When you are applying for a loan, the lender will pay close attention to your credit rating. If you have a high FICO score (usually above 680), your lender will believe that you are likely to pay off your loan, and will give your application a very light review. If your credit score is lower, but still acceptable, you will need to spend more time in the underwriting process. If your score is lower (around 640), your lender will be less willing to give you a loan. Scores in the low 600s or below might result in a complete rejection of your loan.
Since the credit market has tightened up recently, it is becoming even more difficult to qualify for a loan. Buyers used to be able to purchase a home with no or little money down, but that is changing. Most buyers are now being required to put down larger down payments. Additionally, borrowers with credit scores that used to be approved are now being turned down in larger numbers. If your FICO score is low enough, you probably will not get that loan that you used to want.
What to do if Your FICO Score is Too Low
If your FICO score is too low, you can take some steps to improve it so that you can get approved for the mortgage that you want. The first thing to do is make sure that you pay all your bills on time. Late payments will put a large dent in your credit score. As you make on time payments, late payments of the past will start to affect your score less. If you have credit cards that are close to the limit, pay down your credit cards. You should aim to use less than half of your available credit. Your lender might also take other factors into consideration when they decide to approve or deny your loan, such as how long you have lived at your current address, and how long you have worked at your current job, so if you are trying to get approval for a mortgage, you want to ensure that you are stable in these areas of your life as well.
