WHAT'S A FICO®?

As a seasoned real estate agent with nearly two decades of experience in the Raleigh-Durham Triangle area, I've seen firsthand how crucial FICO® scores are in the home buying process. Whether you're a first-time homebuyer or looking to upgrade to a custom-built dream home, understanding your FICO® score is essential. Let's dive into the world of credit scores and how they can make or break your home buying journey.

Understanding FICO® Scores and Their Impact on Home Buying

Introduction to FICO® Scores

When you're in the market for a new home, you'll hear a lot about FICO® scores. But what exactly are they, and why do they matter so much?

What is a FICO® Score?

A FICO® score is like your financial report card. Created by the Fair Isaac Corporation, this three-digit number gives lenders a snapshot of your creditworthiness. It's been the go-to credit scoring model since 1989, and for good reason – it's a reliable predictor of how likely you are to repay a loan.

In my years helping folks find their perfect homes in the Triangle area, I've seen FICO® scores open doors to dream homes and, unfortunately, sometimes slam them shut. That's why I always stress the importance of understanding and improving your score.

How FICO® Scores are Calculated

Your FICO® score isn't just pulled out of thin air. It's calculated using a complex algorithm that looks at various aspects of your credit history. Here's the breakdown:

1. Payment history (35%): Have you been paying your bills on time?
2. Amounts owed (30%): How much of your available credit are you using?
3. Length of credit history (15%): How long have you been using credit?
4. Credit mix (10%): Do you have a variety of credit types?
5. New credit (10%): Have you opened several new credit accounts recently?

Knowing these factors can help you focus your efforts on improving your score where it counts the most.

FICO® Scores and Mortgage Qualification

Now, let's talk about how your FICO® score affects your ability to get a mortgage. As a real estate agent, I've seen scores make or break deals, so this is crucial information.

Minimum FICO® Scores for Different Mortgage Types

Different types of mortgages have different minimum score requirements:

• Conventional loans: Typically need a score of at least 620, but 740+ will get you the best rates.
• FHA loans: You can qualify with a score as low as 500 (with a 10% down payment) or 580 (with a 3.5% down payment).
• VA loans: While the VA doesn't set a minimum, most lenders look for at least 620.
• USDA loans: Usually require a minimum of 640.

In the Raleigh-Durham market, where we're seeing a mix of urban professionals and rural homesteaders, knowing these differences can be a game-changer in your home search.

How FICO® Scores Affect Mortgage Terms

Your FICO® score doesn't just determine if you get a loan; it also impacts the terms of that loan. A higher score can mean:

• Lower interest rates: Even a small difference can save you thousands over the life of your loan.
• Lower down payment requirements: Some conventional loans offer 3% down payments to borrowers with excellent credit.

I've seen clients with higher scores snag deals that seemed out of reach, simply because their excellent credit gave them an edge.

Improving Your FICO® Score for Home Buying

If your score isn't quite where you want it to be, don't worry. There are ways to boost it before you start house hunting.

Quick Fixes for Short-Term Improvement

1. Reduce credit utilization: Pay down those credit card balances. Aim to use less than 30% of your available credit.
2. Dispute errors: Check your credit reports for mistakes and dispute any errors you find.

I once had a client who raised their score by 50 points in just a month by correcting a reporting error. It made all the difference in their loan approval.

Long-Term Strategies for Credit Enhancement

1. Consistent on-time payments: Set up automatic payments or reminders. Payment history is the biggest factor in your score.
2. Diversify your credit mix: Having different types of credit (credit cards, installment loans) can positively impact your score.

Remember, improving your credit is a marathon, not a sprint. Start working on it well before you're ready to buy.

Common Misconceptions About FICO® Scores

There's a lot of misinformation out there about FICO® scores. Let's clear up some common myths:

Credit Myths Debunked

• Checking your own score hurts it: False! This is a "soft inquiry" and doesn't impact your score.
• Closing old credit accounts boosts your score: Actually, this can lower your score by reducing available credit and shortening your credit history.

I always encourage my clients to stay informed about their credit, but to be wary of "quick fix" solutions that sound too good to be true.

The Truth About Credit Repair Services

While credit repair services can help dispute errors, they can't remove accurate negative information. Most of what they do, you can do yourself for free. The Federal Trade Commission (FTC) offers great resources for DIY credit repair.

Monitoring and Maintaining Your FICO® Score

Keeping tabs on your FICO® score is crucial, especially when you're planning to buy a home.

Free Credit Score Resources

• Annual Credit Report: You're entitled to one free report from each major bureau annually.
• Credit card and banking services: Many financial institutions now offer free FICO® score monitoring.

Best Practices for Ongoing Credit Management

1. Set up payment reminders
2. Regularly review your credit reports
3. Set specific, achievable goals for improving your score

In the competitive Raleigh-Durham housing market, staying on top of your credit can give you a significant advantage.

Expert Insight from Tim Clarke

As the founder of the Tim M. Clarke Team, one of the top real estate teams in the Raleigh-Durham market specializing in custom home building, I've seen the impact of FICO® scores on countless home buying journeys. Here's my advice:

1. Start early: Begin working on your credit well before you're ready to buy. Even if you're not planning to purchase for a few years, the steps you take now can significantly impact your options later.
2. Aim higher: If you're looking at an FHA loan that requires a 580 score, set your sights on 620 or higher. This buffer can improve your chances of approval and potentially secure better terms.
3. Take a holistic approach: While your FICO® score is crucial, don't neglect other aspects of your finances. Save for a down payment, reduce overall debt, and stabilize your income. A strong overall financial picture makes you a more attractive borrower.
4. Be patient: Improving your credit takes time. Don't be discouraged if your score isn't where you want it to be right now. With consistent effort, most people can significantly improve their credit over time.
5. Stay informed: Keep track of your score and understand what affects it. Knowledge is power when it comes to managing your credit.

In the Triangle area, where we're seeing a mix of established neighborhoods and new custom home developments, having a strong FICO® score can open up a world of possibilities. It could mean the difference between settling for a starter home and building your dream custom home in one of our beautiful communities.

Remember, your journey to homeownership is unique. What works for one person might not work for another. That's why it's crucial to work with experienced professionals who understand both the local market and the intricacies of credit scoring.

Final Thoughts from Tim

Ready to turn your homeownership dreams into reality? Don't let your FICO® score hold you back. Take the first step today by checking your credit report and setting a goal for improvement. And when you're ready to explore the amazing home options in the Raleigh-Durham Triangle area, from charming existing homes to stunning custom builds, reach out to the Tim M. Clarke Team. We're here to guide you through every step of the process, from boosting your credit to finding the perfect home. Let's work together to make your home buying journey a success. Contact us today and let's start turning that dream home into your home sweet home!

Frequently Asked Questions About FICO scores

What is the range of FICO scores?

The range of possible FICO scores is 300-850. Most people score between 600 and 750.

What is a good FICO score?

FICO scores above 670 are considered good. 720 and above is considered excellent.

How long do closed accounts stay on your credit report?

Closed credit card accounts can stay on your credit report for 10 years from the date they were closed. This continues to impact your credit score.

Does paying off collections help your credit?

Paying off debt collections can improve your credit scores. The collection account will still show for 7 years though.

Does being an authorized user help credit?

Yes, being added as an authorized user on someone else's credit card can help build your credit, assuming the primary user pays on time.

How many credit cards should I have to improve my scores?

3-5 credit cards with low balances can help improve credit. Too many cards or high balances can lower scores.

Does checking your own credit hurt it?

No, checking your own credit scores or reports does not hurt your scores. Soft inquiries from yourself don't impact credit.

How long do hard inquiries impact your credit?

Hard credit inquiries from applications for credit can impact scores for 12 months or more.

How long do late payments impact your credit?

Late payments impact your credit for 7 years but recent lates hurt more.

Should I close old credit cards I don’t use?

Generally it's best not to close old credit cards as it can reduce your overall credit limit and length of credit history, both important FICO factors.