FICO Credit Scores Explained
A Guide for Orange County Home Buyers
Buying a home in Orange County, California, is an exciting event. Buying your first home in Orange County should be downright exhilarating. But before one goes picking out the drapes and introducing themselves to the neighbors, Orange County home buyers need to understand a few things about the process.
Probably the most important thing for aspiring homeowners to consider is the potential impact of their credit rating or FICO score. A credit rating determines the risk involved in lending a potential buyer money. Unless one is blessed with an excessive amount of cash, home buyers will usually need to borrow money and will therefore need to be seen as low risks to lenders.
The bottom line is that borrowers with low credit ratings (bad or no credit) might not be able to borrow money for their home or only able to do so at higher interest rates while borrowers with high FICO scores (good credit) will save money when it comes time to buy their Orange County home. Here is what home buyers will need to know about FICO scores in order to save money and avoid frustration:
FICO Scoring Defined
FICO (Fair Isaac Company) scoring is a formula for credit risk assessment that is believed to be highly predictive of future payment risk. The borrower's score is derived by weighing credit information at a snapshot in time and assessing the “points” for each piece of information. The information is taken from a credit bureau file and scores are based on credit information only. By law, an applicant’s credit worthiness cannot be judged on race, religion, marital status, gender, or nationality. According to Fair Isaac, the information is therefore objective, consistent, and does not discriminate.
FICO scores can fluctuate depending on the credit repository the information is taken from and the geographical location of the borrower. There may be more or less information available which can lead to variations in scoring.
The FICO “Risk” Formula
A borrower’s score is calculated based on the assigned numerical values for certain credit characteristics. The higher the overall score, the less risk there is for the lender.
High-risk characteristics to avoid are:
- Bankruptcy
- Non-bankruptcy derogatory public records
- Charge-offs or loan defaults
- Repossession
- Serious delinquency
Additional characteristics that determine credit scores are:
- Number and age of trade lines – They like to see at least three and it is usually better if they are aged. An example of an official trade line is a credit card but most companies people pay regular bills to can be considered a trade line.
- Presence of derogatory trade line information – Non-payment and late payments will all have a negative affect on FICO scores.
- Current level of indebtedness - Large amounts of outstanding unpaid debt can have a negative effect. Some debt is fine as long as it’s paid off regularly and it is not anywhere near the amount of ones credit limit.
- Type of credit available – Revolving debt can have a greater negative effect than installment debt.
- Amount of time credit has been in use - Age is a good thing.
- Credit inquiries - Opening new credit cards to pay off old cards will have a negative effect.
FICO Risk Weighting
Each characteristic is weighted according to its “predictive power.” Those factors with the highest weights are collections, judgments, bankruptcies, late payments, current balances, too few or too many revolving accounts, finance company accounts, number of accounts opened in the past 12 months, collections, and the number of credit inquiries made.
Credit usage is the key factor and FICO Scoring looks at credit patterns over a period of time. In other words, one late payment will not ruin a credit score. However, a history of late payments and high credit balances will have a serious effect on an individual’s score.
Errors In FICO Scoring
Errors on credit reports occur for many reasons. In the event of divorce, a buyer’s credit may be impacted if the spouse does not maintain payments, even if the court has made their spouse responsible for the outstanding debt. If a prospective Orange County home buyer has a bankruptcy that was discharged, there may be outstanding charge-offs or unpaid collections on the report that in fact were discharged through the bankruptcy. Because of these things, everybody is encouraged to check their credit reports at least once per year for errors or fraudulent information.
If a buyer feels there are errors contained in their credit report, they should contact the credit bureau. According to the Fair Credit Reporting Act, borrowers may fill out credit dispute forms and file them with the credit bureau for investigation. They may also do so by contacting the appropriate credit repository. The three repositories are Equifax, Experian, and Trans Union Corp.
What Individuals Can Do To Maintain Good FICO Scores
1.) Talk to a qualified lender - If an individual is thinking about buying a home in Orange County, especially if it will be their first home, one of the very first things they need to do before they even go looking at homes is to talk to a lender about their FICO scores. A qualified lender will be able to give them a look at how they are scoring and what can be done to help them score better if their scores are lower than needed.
2) Avoid big purchases on credit - New debt, particularly for major expenditures has an immediate negative impact on a buyers score. Hold off on that new car or new refrigerator until after you’ve moved into your new home.
3) Bills must be paid on time, all the time – First time home buyers can’t go “stickin’ it” to the landlord just because they think they just bought a new house. But just in case someone has forgotten a bill or two in their day, rest assured that delinquent payments and collections will have less effect on their score over time as long as all new bills are paid on time from that point forward.
4) Pay down those balances - Be aware that the revolving debt has higher negative impact on the borrower’s score than installment department. “Shopping” for credit and opening a new credit card accounts to pay off old accounts will also negatively influence the scores.
The Next Step
Minor differences in FICO scores can increase a borrower’s interest rate significantly, as well as increase the documentation required by the lender to obtain a loan. This translates to Orange County home buyers as more costs and more headaches. As we said before, a home buying experience should be exhilarating, not exhausting. Knowing a little about your FICO scores and how they will affect your ownership of Orange County real estate will go a long way in making one’s home-buying experience as rewarding as it should be.
But just in case somebody falls into the category of prospective home buyers with less than stellar credit, they need to understand that a wide variety of home loan products may be still be available to them. Borrowers with low credit scores are often able to purchase Orange County homes and those that are unsure should not make the mistake of walking away from finding a good home just because they “think” they won’t qualify.
Those who are looking at homes in our area should visit our Orange County Home Loans page for more info about lenders who may be able to help one qualify for the home of their dreams. They should then learn more about finding that house with our Homes For Sale in Orange County page. Happy hunting!
About the Author:
Bob Foust is the chief executive for the FOUST Team at C21 Discovery; one of the top-selling real estate teams in Southern California. He specializes in Orange and Los Angeles Counties and operates one of the area’s most informative real estate websites. To contact him or learn more about Orange County real estate, please visit www.FOUSTonline.com.
Home > Library > General Real Estate Info > A Necessary First Step for Orange County Home Buyers
