A FICO Score to Open the Door

If you've ever had that nightmare about showing up unprepared for an exam or a performance, you have a pretty good idea of how most first-time homebuyers feel. While they may have a good grasp of the basics of the purchase, there is also that nagging feeling that some hidden nugget of information could mess up the whole thing.

Unfortunately, the nature of credit scores contributes to this anxiety. FICO scores, developed by Fair Isaac Corporation, are the most common credit scores used by mortgage lenders to determine not only who gets to buy a home, but also at what interest rate. However, beyond a few basics like good payment history, low revolving accounts usage, old accounts and diversity of credit, Fair Isaac releases little information about what goes into having a good score. Luckily for us, like the ingredients of a secret recipe, some previously unknown FICO score factors have leaked out over the years. Although they are little known to the general public, these factors could help squeeze a few extra points out of your FICO score and make all the difference for your home purchase. Just remember these three “A’s” to help you ace your mortgage application.

Active Accounts
If you don’t have any new activity listed on your credit report for the past six months, you may not even have a FICO score. Preparing to buy a home isn't just about removing negative information from your credit reports; you also need to consistently add positive information, like on-time payments on an open account.

Adjust Usage
When calculating how maxed out you are on your revolving accounts like credit cards and lines of credit, the FICO score doesn't look at whether or not you paid off the account in full last month. Instead, what gets plugged into the formula is the amount due on the account the last time a bill was issued. For example, if you have a credit card with a limit of $1,000 that you charged $550 on last month before paying off, the calculated usage percentage for that card would be 55%, not 0%. The best way to prepare a credit card or other revolving account for a mortgage application is to either use a very small percentage of your limit the month prior to applying for the mortgage, or to pay off the balance before the bill comes due for that month.

Appropriate Number of Accounts
The ideal number of revolving accounts to maximize your FICO score is two to four. If you have more than that it could not only hurt your score, but also make it look to lenders like you need to use these accounts just to pay your bills on a monthly basis. If you have more than four revolving accounts and need to decide which to close, strongly consider closing store or gas credit cards as mortgage lenders tend to look less favorably on these than general-purpose cards. Other good candidates to close are accounts that have been open for a short time or those with a low spending limit.

Knowing these FICO factors before you apply for a mortgage could not only get you through the door of that new home, but also get you a monthly payment that will keep you walking happily through it for years to come.