Your credit ‘report card’ and how it affects your home buying future

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Published Date 12/1/2023

Making buying a home a reality depends on several factors — many of them numbers. Home prices, mortgage rates, down payments, and time frames to name a few. But there is a lesser-known figure that can be the deal maker or breaker: your FICO score.

Lenders need to know just how good a bet you are to repay the money you’re asking for, so they pull what is called your FICO score, a three-digit number that represents your creditworthiness. That number, which ranges from 300 to 850, is akin to a financial compass in the housing market. It determines (1) whether you’re approved for a loan (2) your interest rate, and (3) your mortgage terms.

To put it simply, your FICO score is one of the many keys that unlock the doors to homeownership. To make sure you’re getting the best deal, however, you should understand how credit scores work before you apply for a loan. According to Realtor’s Angela Colley, while there are several types of credit scores, most lenders use the credit-scoring model developed by the Fair Isaac Corp. — a three-digit number lenders use to determine how risky it would be to loan you money.

“For example, if your credit score is 420, you’re considered a very high-risk applicant and you may struggle to get approved or find good rates,” says Colley. "If your credit score is 780, you’re considered a low-risk applicant and you’ll likely get the best rates and terms when you apply for a loan.”

FICO is essentially the aggregator, however — not the entity that determines your score. Instead, the information is collected by the three main credit bureaus — Equifax, TransUnion, and Experian. Each credit bureau gathers information about your financial habits and feeds the information into your credit history, which stretches back anywhere from 7 to 10 years.

When you hear the expression “we’ve got your number,” never is it more true than with your credit history. “Everything—from your application for a retail store card to whether you pay your bills on time each month—is reported on your credit history,” says Colley.

The formula used to determine your FICO score proportionately includes your payment history (35%), your debts owed (30%), the length of your credit history (15%), the types of credit you have (10%) and your applications for credit (10%).

Before you even begin looking at houses, it’s a good idea to pull your credit reports and credit scores several months ahead of time — before you apply for a loan. By law, you’re entitled to a free copy of your credit report from each bureau once a year, procured through AnnualCreditReport.com. Or, you can order your credit scores for a small fee directly through the credit bureaus’ websites. But be aware that your FICO score will not be included on your free credit reports.

Realtor, TBWS

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