If you’re seriously thinking about buying a home in the months ahead, you almost certainly know how important your FICO credit score will be in getting a mortgage.
And you probably know the score range you’ll need for the type of loan you want — somewhere in the low to mid-700s for a conventional mortgage eligible for sale to investors Fannie Mae or Freddie Mac, or a score in the mid- to upper 600s for a Federal Housing Administration (FHA) insured loan. The actual minimum score for approval also will depend on your debt-to-income ratio, down payment and other factors in your application.
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But let’s say you’re like many other would-be buyers — your FICO score isn’t quite where it needs to be. The question then becomes: How do I push my score high enough for a mortgage? You may know the credit missteps that caused your score to be low, but you lack a precise set of steps to move your score up. There are dozens of websites online that can offer you “credit repair” suggestions and scores, but none has access to proprietary FICO-score algorithms. As a result, they’re not reliable when you apply to a lender, who will only be interested in your FICO score, not some credit site’s in-house score.
That’s all about to change. FICO has created a new prescriptive “Score Planner” tool that the company says will allow you to improve your score within a set time period by following a customized, detailed set of steps. Though it’s only in the pilot stage with one of the three national credit bureaus, Experian, FICO officials told me last week that in the months ahead it should become widely available through participating banks, mortgage companies, brokers and others. Tom Quinn, FICO’s vice president of scores, said in an interview that it may be offered “for a fee or free of charge,” depending on the source.
How does it work? For this column, FICO prepared an example based on a hypothetical consumer’s credit report. The borrower currently has a subpar 623 score but needs a 675 or higher for a mortgage at an affordable interest rate. As with all the Score Planner’s scenarios, the home buyer sets a deadline — anywhere from a few months to as long as a year — to achieve a desired score.
In this case, the buyer opted for a nine-month time frame. Here’s the remedial course of action the Score Planner prescribed. Note the significance of factors most of us ignore that go into the formulation of FICO scores, such as “aging” of positive and negative items in your credit report.
- Stay current on your payments so that your most recent delinquency ages to 19 months.
- Do not open any new accounts so that your most recently opened account ages to one year and two months.
- Do not open any new accounts so that your average length of established credit history ages to four years and three months.
- Reduce your total revolving credit-card balances of $7,250 by $805 each month for nine months.
- Continue to make monthly loan payments on time to reduce the total installment loan balance of $163,780 that you owe.
- Do not apply for any new credit and pay all bills on time for nine months.
Could you raise your score by more than the 52 points above? Absolutely, says Quinn. In FICO’s simulations of score improvements, some jumped by more than 100 points in 12 months. Every individual’s credit report is unique, but by paying down debts — such as on credit-card balances — “substantial” improvements in score are feasible.
Doing so before you apply for a mortgage not only will improve your chances for approval, it should also save you thousands of dollars. A new study from LendingTree, the online network that allows lenders to bid for applicants’ mortgage business, found that moving from a FICO score between 580 and 669 to a 740 score would save the borrower more than $29,000 over the life of a $234,000 loan.
To access the Score Planner pilot on Experian you can visit experian.com/consumer-products/credit-score.html. Note, however, that the FICO planner is part of a package that will cost you $4.99 the first month and $24.99 per month thereafter, cancelable anytime. As an alternative, you could wait until lenders and mortgage brokers offer the planner at a more modest cost or free of charge.