If you are in the market to buying a home, your credit score is an important ingredient. Its a measuring stick that gives lenders an indication of your payment history and ability to repay your debt. While you may recognize the term FICO, in this episode we are going to unpack it and sort it out so you’ll have a much deeper understanding of what it is and how it helps you in your real estate journey.
A brief history lesson
FICO stands for Fair Isaac and Company and it represents a system created in 1956 by an engineer and a mathematician. They designed a way to measure a consumers credit worthiness for borrowing money. The 1950s was certainly not the first time in history that someone borrowed money, but up to this point there was not a systematic way to clearly evaluate a persons history of lending. The Fair Isaac Company sought out to alleviate that.
What do the numbers mean
The numbers of your FICO score range from 350-850. The formula that gets your credit score is 35% payment history, 30% on amounts owed, 15% on the length of your credit history, 10%on the mix of your credit and 10% on your new credit.
Lenders and banking institutions use that score to determine the likelihood of you being able to pay back a loan, credit card or line of credit. Your FICO score is an important indicator to lenders. While its not the most important factor in your life, it is something you need to consider if you are about to jump into the world of home ownership and you aren’t independently wealthy and in a cash position to pay for the home.
What does my score need to be in order to buy a home
The number for home ownership varies but you can expect to need a minimum score around 620. Some lenders are going to vary but that may be a good starting point. Your credit worthiness will determine the amount needed for your down payment and your interest rates. It literally pays to have a good credit score.
Does everyone have a FICO score?
Yes…sort of! I know that’s a strange answer, but there are people who are “un-scorable”. Technically they have a score of 0 but thats because they have either no credit history or haven’t borrowed money in so long, the algorithms that result in your score can’t calculate a number.
Personally my goal is to have a 0. We are working on our debt free journey through Dave Ramsey’s Financial Peace University and once we are debt free, home and everything, we plan to never borrow money again…which would result in a 0 score.
If you don’t have a credit score, it is still possible to get a loan. You will have to find a lender who does a system called “Manual Underwriting”. This is what they would have done before Fair Issac came along. A lender working would need to look over your file and data and make a determination on your loan.
More coming soon
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Rose and Womble Real Estate
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