You Deserve Some Credit - And a Great FICO!

Well maybe not today! But after you're done reading the next series of posts and you apply the knowledge you've gained to your credit, you certainly will.

One of the major hurdles you will have to get over when applying for a home mortgage is your credit and your credit score, or "FICO" score. There's just no getting around it, if you want to borrower money today, you have to have great credit. Never has this been more true. Banks and other lenders have tightened up guidelines significantly and are now requiring a 620 minimum FICO on an FHA mortgage - a program that has no FICO minimum! Even if you have a great job, and a big downpayment, you still won't be able to get a home mortgage loan without at least good credit. Fair or "OK" credit just won't cut it anymore.

First let's tackle the FICO score. FICO is an acronym for Fair, Isaac and COmpany. Fair, Isaac and Company, after analyzing millions of credit reports, developed a statistical model which has proven to be quite accurate at predicting the risk of default on a particular type of loan like an auto loan or mortgage loan. The higher the score, the lower the chance of default. Scores range from around 300 to 850. To get a home mortgage today, you must get above 620 (this is the Fannie Mae and Freddie Mac minimum) and if you can get to 740 credit probably won't be an issue. For a really good and concise overview of the components of the FICO score check out the following link, http://www.mbda.gov/?bucket_id=131&content_id=2287&section_id=3

The median FICO according to MSN Money and http://www.bankrate.com/ is 723. That means that have fall above and half fall below that number. More specifically the the distribution of scores is as follows:

300-499 2%
500-549 5%
550-599 8%
600-649 12%
650-699 15%
700-749 18%
750-799 27%
>800 13%

I have a friend who says, "If you are trying to get from point 'A' to point 'B' you first must know what point 'A' is." You need to know where you are before you can make a plan to get where you want to go. So the first thing you will need to do is get a copy of your credit reports. There are three credit bureaus or repositories and each of them have slightly different information on your report so you must get a copy of each one. Because they have different information, they will also have different scores on you. A mortgage lender will use the middle of three scores when determining if your credit is acceptable for a mortgage loan.

One way to find out your FICO scores is simply to apply for a mortgage. By law, the FACT Act or FACTA, every lender needs to disclose your FICO scores when you apply for a home mortgage. The problem however is that you won't get any details as to why each of the three scores are what they are. The solution is to get a full copy of your credit reports with FICOs. You can do this by either going to each of the credit bureaus' websites and ordering a free copy of each report individually (you can get one free one per year) or you can go to one of the branded websites and get a copy of all three reports at once. Following is a list of the various websites of interest.

http://www.transunion.com/
http://www.experian.com/
http://www.equifax.com/

http://www.myfico.com/
http://www.truecredit.com/
http://www.freecreditreport.com/
http://www.freecredit.com/

www.ftc.gov/bcp/edu/pubs/consumer/credit.cre34.shtm
http://www.annualcreditreport.com/
www.ftc.gov/credit

Obviously there are hundreds of websites related to your credit, but the above are the most relevant. The most helpful and utilitarian in my opinion is http://www.myfico.com/ as this site is owned and operated by Fair, Isaac and Company therefore has many features that will aid in your quest for an 800 FICO score. In my next post I will delve much deeper into the actual mechanics of improving your FICO score in the hopes of getting a VA, FHA, or Conventional Mortgage.