How Is My FICO Score Calculated? RealtyBiz News reported, “The FHFA was planning to update its FICO credit scores model in order to make it possible for more Americans to obtain a better credit score and begin the journey towards homeownership.
“The FHFA’s existing model, which is provided by FICO, has been the subject of much debate. Efforts have been made to use less traditional sources of data with this model, including people’s rent and utility payment histories, so as to boost the credit scores of consumers who currently don’t qualify for a mortgage. Using this information becomes a problem in that much the information doesn’t get reported to the credit rating agencies from which FICO obtains its data.”
“Mortgage News Daily says there are around 7.6 million Americans who do not have a credit score, and that these people may have been able to reach a score of 620 or higher based on the newer proposed models that incorporate other kinds of data. Mike Trapanese, during a panel discussion sponsored by the Urban Institute last year, said around three million of these consumers might have been able to qualify to buy a median-priced home in their area under the new models.”
Caroline Mayer, consumer blogger, says, your FICO score is calculated using an algorithm designed to predict your likelihood of repaying debt. Lenders use your score to determine whether to approve you for loans and credit cards and at what interest rates. Insurers use credit scores to set premium rates, and employers use them when making hiring decisions.
FICO credit scores run from 300, considered the highest risk of default, to 850, the lowest risk. Though FHA for years has accepted applicants who have FICO scores in the 500s, the practical reality has been that most lenders ignore borrowers whose scores are under 620 or even 640.
Your score is based on many different pieces of credit data in your credit report grouped into five categories. The percentages in the chart (above) reflect how important each of the categories is in determining your FICO Scores.
If you don’t know your FICO credit score, you can request a free copy of your credit report then check it for errors, such as late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts are correct. If you find errors on any of your reports, dispute them with the credit bureau.
Forbes says to be careful with some consumer sites offering free credit reports. “The new free scores from consumer sites often use “ballparks,” not the ones used by financial institutions to determine credit. Even more confusing, your FICO credit score or Vantage score may differ from lender to lender, since each institution can tinker with the parameters.
Some use scores created by FICO. Others use VantageScore, developed by credit rating bureaus Experian, Equifax and TransUnion. Still, others compute scores by working with a single credit bureau. FICO and TransUnion’s New Account Score ranges from 300 to 850; Vantage, from 501 to 990; Equifax’s is between 280 and 850, and Experian is 330 to 830.
Kenneth Harney at The Real Deal writes, “If you’ve got a low FICO credit score but believe you can handle monthly mortgage payments instead of rent, here’s some potentially good news: The government is now willing to give you a better shot at obtaining a low-down-payment home loan from the Federal Housing Administration. Under a key policy change that took effect last week, lenders nationwide now have more leeway to approve mortgages to borrowers who qualify under FHA’s underwriting guidelines but may have below-par FICO credit scores.”
Reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. Then come up with a payment plan that pays off the cards. Once you pay off credit card debt, build an emergency fund equal to six months living expenses. Finally, save large amounts of money going to interest by paying off your mortgage early.
If you are ready to make the leap to owning a home and you have a low FICO credit score, shop around. Some lenders may turn you down because their standards remain the same. Keep shopping until you find one that has. You are likely to find a better reception than you expected.
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