A solid FICO Score helps optimize your ability to obtain a better home loan. And, since the overwhelming majority of us don’t have the ability to purchase a new home with a cash payment, getting a good loan with great terms is essential to our ability to purchase a new property. It also can have a major impact on your finances going forward over many years.
A FICO score is the credit score created by the Fair Isaac Corporation (FICO). Lenders use borrowers’ FICO scores, along with other details on borrowers’ credit reports, to assess credit risk and determine whether to extend credit. Having a strong FICO Score positions you favorably for quicker approval and better lending rates.
There are several ways you can optimize your score. The main “levers” or contributors to your score are:
- Your Payment History
- The Amount of Money You Owe
- The Length of Time of Your Established Credit
- Any New Credit You Have Applied for and/or Received
You can improve your FICO Score, and therefore increase your ability to qualify for favorable home loans by managing these levers. For example, you can:
- Pay all your bills on time.
- It’s important to avoid going to collections because an account that goes to collections stays on your credit report for 7 years. This is true even if you pay it off.
- Keep your credit card balances low. Having higher AVAILABLE credit improves your FICO Score.
- Pay off your debts. Lower levels of outstanding debt helps your score. Also, consolidating your debt so you have fewer accounts may also help.
- The number of credit inquiries you make do affect your score. So, don’t make inquiries you don’t really need.
- Don’t open accounts you don’t need.
- Make sure you show you have managed credit responsibly. Responsibly managed levels of credit will result in you being rated as a better risk than if you had no credit or debts at all.
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Check out more helpful hints to make buying a home easier on our Home Buying Tips category page. Click here to learn more.