Financing and Insurance
Why Do You Want a High FICO Score?
According to Fair Isaac Corporation, the difference between a credit score of 620 and 760 often can mean tens of thousands of dollars for the life of your loan. A low score can cost you money each month or even stop you from refinancing at a rate you know other people are getting.

How Are FICO Scores Calculated?
Different credit data are collected to determine your credit score. These data can be grouped into five categories weighted at different percentages, which reflect their importance in determining your FICO score. The five categories include payment history, outstanding credit, length of credit history, new credit acquired or applied for and types of credit used.
  • Payment History: The first thing any lender wants to know is whether you have paid past credit accounts on time. This is considered the most important factor in a FICO score, accounting for approximately 35 percent. Activities that impact this negatively include bankruptcy, liens, wage garnishments and delinquency (past due balances).
  • Amounts Owed: Number of accounts you hold with balances represents approximately 30 percent of your FICO score. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
  • Length of Credit History: In general, a longer credit history will increase your FICO score. However, even people who have not been using credit long may get high FICO scores depending on how the rest of the credit report looks. Credit history accounts for approximately 15 percent of your FICO score.
  • New Credit: Many factors of new accounts impact the FICO score. It considers how many new accounts you have by type of account, how long it has been since you opened a new account and how long it has been since credit-report inquiries were made by lenders. Re-establishing credit and making payments on time after a period of late payment behavior will help to raise a FICO score over time. Your new credit accounts make up 10 percent of your FICO score.
  • Types of Credit Used: Approximately 10 percent of your FICO score is based your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your FICO score also takes into account the kinds of credit accounts you have: Have you had both revolving and installment accounts or has your experience been limited to one type? It also considers your total number of accounts and how many of each kind. The appropriate number varies depending on an overall credit picture.

According to Fair Isaac Corporation, a FICO score takes into consideration all these categories, not just some of them. Lenders also look at other factors when making a decision, including your income, how long you have worked at your present job and the kind of credit you are requesting.

Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your credit score.

Visit
www.myfico.com to select credit calculators to compare loans, determine mortgage payments, see whether a fixed or an adjustable loan makes sense, determine closing costs and assess whether renting or buying is a better option for you.

SAVING FOR THE DOWN PAYMENT

It is recommended to pay about 20 percent or more of the cost of the home for the down payment. This is known as 80-percent loan-to-value (LTV) ratio. If you put down less than this you will be required to pay private mortgage insurance (PMI), which protects the lender in the event you default on the loan. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan. The amount of PMI is determined by the size of the down payment, the type of mortgage and amount of insurance, and it is paid monthly with the mortgage. Under the federal law, the lender is required to cancel the PMI once the LTV ratio reaches 78 percent or when your mortgage has amortized to 78 percent of the original value of the house. The borrower must be current on all mortgage payments, and the lender must tell the borrower at closing when the mortgage will hit that 78 percent mark.

GETTING YOUR LOAN APPROVED

Being preapproved by a lender can put you in a much stronger negotiating position because it shows the seller that you are a qualified, ready-to-buy buyer, financially capable of buying the property and more likely to close on it. Getting preapproved also allows you to see your financial condition and how much you can afford before you begin your home search.

   
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