How a FICO score affects your home-buying ability

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Special to The PREVIEW

Q: What is a FICO score and how does it affect my ability to buy a home?

A: The FICO score is the best-known and most widely used credit score model in the United States.

First introduced in 1989, the system was designed to create consumer credit scores using information provided by one of the three major credit reporting agencies — Equifax, Experian or TransUnion, with scores ranging between 300 on the low end to 850 on the high end. FICO itself is not a credit reporting agency. Your FICO score is a primary factor in determining whether you pay a higher interest rate, how much a lending institution is willing to lend you to purchase a home, or getting denied all together.

Any time you need to borrow money to purchase a home, car or other large items, lenders examine your credit score to see if you are “credit worthy.” The concern for the lender is whether you will be able to repay the loan on a schedule you agree to follow. Today’s lenders are even more cautious about taking on unnecessary risk and have the relatively new government mandated “ability-to-pay” rule to contend with, as well, before they approve you for a home loan.

As a result, your FICO score becomes even more important in determining if you will be able to borrow the money you need.

In addition, your Realtor will want to know your credit worthiness in order to effectively guide you in finding a home that is within your financial reach and to assist you through the loan process. Sellers who are evaluating multiple offers for their home will seriously consider your offer if you can prove you are credit worthy for a home loan. One of the first steps in that process may be to ask a lender to review your credit score and provide you with a letter showing that you have the resources to obtain and pay off an appropriate loan.

A single mistake, intentional or not, on your credit history may cause you problems when requesting approval for a home loan. It is recommended that you check your credit history annually. Credit reports can often be obtained free of charge on an annual basis through the major credit reporting agencies.

You can purchase your FICO score online. You can also request a disclosure that includes this information if you are ever turned down for credit or charged more by a lender. Some banks and credit unions even offer these reports for free as a part of your account.

Some of the main factors that determine your score and how they are weighted are:

• Payment history (35 percent).

• Debt/amounts owed (30 percent).

• Age of credit history (15 percent).

• New credit/inquiries (10 percent).

• Mix of accounts/types of credit (10 percent).

All of these factors are considered in other credit score models, so it’s safe to say that if you have a strong FICO score, you likely have a good score with other models, as well. When you check your credit score, don’t get too hung up on the specific number. Instead, focus on what areas of your credit are strong and which ones you might want to work on to improve your credibility.

Once you check this off your home shopping list, you are one step closer to owning a place you can call home.

This article was provided by the Colorado Association of Realtors.