So you are ready to purchase a home. Before you begin searching for a home first consider your credit.
Many homebuyers make the mistake of finding a home and then looking at their credit report. A better approach is to review your credit with your mortgage professional before you begin your home search so that any issues can be resolved in advance of your search. Your lender can provide you with advice for mortgage loan types and negotiating angles for your real estate agent when it comes to the contract.
Get a credit report
When you apply for a mortgage one of the initial and most vital tasks your lender will do is to obtain a three bureau credit report.
The three primary credit reporting agencies are:
In additional to your household income, assets, and debts, the three bureaus provide a report along with a credit score called a FICO.
What is FICO?
FICO is a company which used to be called Fair Isaac Company. It was shortened to FICO many years ago, and that abbreviation is now the brand standard. FICO specializes in what is known as “predictive analytics,” which means they obtain information and analyze it to predict a likely outcome.
In the case of credit scores, FICO collects credit information about a person and uses that information to develop a score that lenders use to predict behavior, such as how likely someone is to pay their bills on time (or not).
To create credit scores, FICO uses information provided by the three credit reporting agencies (Equifax, TransUnion, and Experian). FICO itself is not a credit reporting agency.
How is a FICO score computed?
FICO scores range from a low of 300 up to a high of 850. The higher the number represents to the lender the less risk they have in making a loan. Consumers with high FICO scores get the best interest rates when they borrow as well as the best discounts on home insurance.
Following are the main factors that make up your credit score:
Payment history (35%)
Debts and account balances (30%)
Age of credit history (15%)
New credit and recent inquiries (10%)
Types of credit (10%)
All of these factor into the credit score model that provides an output with a three digit score for each bureau.
Save potentially thousands of dollars
So if you are thinking about purchasing a home, get your three bureau credit report first. It will give you peace of mind as well as allow your lender the opportunity to help you with the best buying strategy that could save you thousands of dollars.
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