Welcome to CA Realty Training’s weekly blog - this week’s topic is about credit scores, also called FICO scores. Are they important for buying a house? Who is looking at these scores? How do you improve them, if necessary?
First, let’s break down the acronym FICO: it stands for Fair Isaac Company - the company that came up with and computes these scores. These scores range between 300-850, giving a quick glance of how good that person is at paying back their debts on time.
These scores are compiled by three major agencies - (1) Equifax, (2) Experian, and (3) TransUnion. These three agencies will each give you one credit score, so every American adult with credit has three credit scores that are usually a little bit different from each other. Provided they are close, everything is good and there should be no red flags on your credit.
Now, we dive into the important issue - when are FICO scores used for buying a house? Well, since most real estate transactions are not all-cash, they have to involve a lender. When the lender gets involved, they are lending the buyer (“borrower”) a significant amount of money, and they, the lender, want to know that they will be paid back, in full, on time.
When a buyer first approaches a lender, they visit a bank or mortgage broker, start chatting, and then the lender/mortgage broker will start to qualify the buyer as a potential borrower. They might ask questions like, “How much money do you make? How long have you been at your job?” and more, to get a sense of how reliable your income is. However, they don’t know how good you are at paying your debts, until they run your credit score.
When they run your credit score, they get three numbers back - let’s say, for the sake of argument, that one bureau gives you a 700, one gives you a 729, and one gives you a 725. You have very good credit and they are all close to each other, so there are no red flags here. The lender (or bank) will then take the middle of those three scores (so, the 725) and use that as your credit score when determining your eligibility for the loan.
Let’s say you make a lot of money, but for some reason, you’re very bad at paying back your debts. Even though your income might be great for the loan, your FICO score will suffer if you have unpaid debts or late charges on your record. Every late credit card payment matters, every missed car payment or especially a missed mortgage payment -- these are all big dings to your credit score!
If you don’t have a good FICO score, the lender will think you are too risky to lend money to, because they might not get paid back. Since getting their money back is the most important mission of every lender, they are not likely to take a risk on you if you have a bad track record of paying back debts.
Let’s take an FHA loan, which stands for Federal Housing Administration. It’s a special loan designed to help first-time homebuyers, with only 3.5% down instead of the traditional 20%!! So, as you can see, most first-time homebuyers would be much better off with an FHA loan than a conventional loan. However, buyers have to have a credit score of 580 or better to get an FHA loan. What do they do if their score is, say, 575?
There are a number of quick, simple fixes to raise your credit score by a few points. Once your credit is run, your lender should review the findings with you if the score needs to be brought up or if there are any outstanding debts on your report.
A few small unpaid bills from years ago can impact your score negatively by a few points, so if you have any old unpaid debts, pay those off before applying for a loan! If you weren’t aware of them, don’t worry. Your lender will often counsel you to simply pay off those old debts, and then they’ll do what’s called a rapid rescore -- running your credit again quickly just to confirm that the score raised enough to qualify you for the loan.
If your score is further from the mark, there are credit counseling services to look into. There are many types of credit counseling and their main mission is to improve your credit score and get rid of your past unpaid debts or late charges.
As we reviewed, getting a good loan is dependent on having a good FICO score. So to recap, is the FICO score important? YES, YES, YES!!! Keep on top of your score, find out what it is from the three credit bureaus, and do everything you can to improve it if you are trying to buy a house or even apply for an apartment lease. It gives people a quick look at your credit worthiness on an easy, universal scale, and makes or breaks the loan.
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