FICO Score And Securing A Loan

So, you've decided to purchase a home and are in the process of obtaining the financing required for such a large investment. Homeownership is one of the safest investments that a person can make, which is evident by the fact that the national home sale average has never dropped since the end of World War Two. However, the financial perks of homeownership are found once the home is finally paid off. Therefore, there is the little matter of obtaining a home mortgage loan and then paying it off to attend to.

Credit Scoring

When you apply for authorization for a home mortgage loan, you will undoubtedly encounter FICO scores. A form of credit scoring, FICO scores are named for the company that has produced this most popular method of credit scoring: Fair Isaac Credit Organization. FICO scores have slowly become one of the main determinants that loan source use to measure prospective borrower's credit worthiness and it affects your home loan in numerous ways.

Before discussing FICO scores and how does it affect your home loan, it is important to have a quick overview of what FICO scores are. FICO scores is a form of credit scoring, which is a sophisticated mathematical method that aids lenders determine the credit risk that each borrower presents. FICO scores measure a variety of fiscal issues that are used by the lender to establish their loan applicant's credit behavior as well as the credit behavior of other borrowers. The fiscal determinants that are used in the compilation of a FICO score include: credit history, income levels, outstanding debt, dept utilization history, access to credit, and other factors. A FICO score is a numerical value that ranges between 300 and 850. A low FICO score is indicative of a poor credit risk, and for the most part, lenders consider a FICO score of 620 as the cutoff point for loan eligibility.

FICO Scores

The widespread use of FICO scores by lenders in determining a borrower's credit worthiness has been a recent trend caused by financial studies. The overall trend of placing greater importance on credit scoring results can be traced to studies that have shown a correlation between a borrower's credit score and mortgage delinquencies. In previous years, a borrower's credit worthiness were based solely on their past history in making payments. However, studies of credit scores have shown that the lower a borrower's credit score is increases the likelihood that the borrower will be ninety days delinquent in the payment of a mortgage payment at least once during the span of the mortgage plan. Studies have shown that the relationship between a borrowerï¿½s FICO score and the likelihood of a ninety-days delinquency follow this trajectory:

Fico Score: odds of a delinquent account (expressed in ratio) 595 ï¿½ 2.25:1 600 ï¿½ 4.5:1 615 ï¿½ 9:1 630 ï¿½ 18:1 645 ï¿½ 36:1 660 ï¿½ 72:1 700 ï¿½ 288:1 780 ï¿½ 576:1

As a result of FICO scores, lenders are now more able to accurately decide on prospective homebuyer's eligibility to obtain a home loan. However, for individuals who are worried that they may receive a FICO score lower than 620 that would result in their inability to obtain a home mortgage loan, a low FICO score does not mean the end to hope of acquiring the financing needed to purchase a home. Rather, FICO scores only make up a component of how an underwriter for a loan source evaluates a borrower's credit worthiness.

Other Factors

These underwriters are more than willing to look at other factors that may compensate for a low FICO score, such as:

· Large down payment made on the home

· Low debt-to-income ratios

· An excellent proven history of saving money

· Reasonable explanations for factors found within their credit history that has negatively impacted their credit score.

Low Scores

Additionally, prospective homebuyers that have a FICO score of lower than 620 will be able to obtain a home mortgage loan from the private sub-prime market. However, the mortgage home loan programs that are available in the private sub-prime market usually contain higher mortgage interest results that offset the credit risk that borrower's represent.

Besides influencing whether or not a prospective homebuyer is eligible for home mortgage loan financing, FICO scores have a number of other ways that affects a person home loan. As lenders become more reliant on FICO scores to determine levels of credit risks that borrowers represent, the more ways that FICO scores affect various aspects to a home loan. Lenders have become increasingly savvy in the terms of the home mortgage loan plans that they offer to clients as they attempt to fund loans with rates, fees, and terms that match precisely with the borrower's delinquency risk.

How FICO Scores Affect

The manner that FICO scores affect the mortgage interest rates is arguably more important than the way that they affect a borrower's mortgage eligibility. By examining the credit risk that is represented by borrowers with lower FICO scores, lenders have become more adept in protecting their financial assets. They use FICO scores as a way to give incentives to borrowers that represent lower credit risk due to their high FICO scores and perform the opposite by imposing higher rates to borrowers with low FICO scores.

For example, many lenders establish a base price to a mortgage loan that can be adjusted based on a borrower's FICO score. As a result, additional points on a loan will be reduced if the borrower's FICO score is above a certain level. One particular major national lender adjusts the terms of a loan to a borrower's FICO score by reducing the cost of a loan by a quarter point if the borrower's FICO score is greater than 725. This same lender rewards borrower's that have a FICO score between 700 and 724 by reducing the cost of their mortgage loan by one-eighth of a point. One point is the equivalent to one percent of the total home mortgage loan amount.

Other major lenders utilize a similar strategy in adjusting the terms of the mortgage loans that they offer to borrowers based on a borrower's FICO score. Similar to the first strategy, a base price is established for a mortgage loan plan. However, additional costs are placed on this base price for prospective borrowers that have a low FICO score. This is just the reverse method that is found in the first strategy and both strategies result in approximately the same interest rate that is offered to borrowers.

Your Level Of Worthiness

Due to the way that they measure a borrowers' credit worthiness and the risk that they represent to a lender, FICO scores influences the nature of a home mortgage loan in numerous ways. From the way that it assists in determining whether or not a prospective homebuyer is eligible to obtain a mortgage loan to the way that it affects the terms of mortgage plans that are offered to a borrower, FICO scores have created radical changes in the home mortgage loan industry.

Many of the changes caused by FICO scores and other forms of credit scoring have been positive. Due to its ability to assess credit risks, loan sources have found that they have lost less of their investment to borrowers that are caused by delinquencies. As a result of the extra credit that these lenders have available, more prospective homebuyers have been able to obtain the financing required to purchase a home. Additionally, homebuyers have credited the use of FICO scores in improving their ability to obtain a mortgage. Homebuyers feel that FICO scores make loan approvals faster with less hassle and increased convenience for numerous mortgage loan packages. For individuals with lower FICO scores, they are able to acquire financing through a lending market that only developed due to the presence of FICO scoring. The sub-prime lending industry could not have developed without FICO scores, as credit scoring has created a market of prospective homebuyers that require home financing but have low FICO scores.

However, many individuals felt that the use of FICO scores by lenders has tipped power in the relationship between lender and borrower to the lender. FICO scores are usually not released to the borrower, and this lack of information makes it nearly impossible for the homebuyer to leverage their credit information for a better mortgage loan deal. The accessibility to FICO scores is an issue that many individuals are trying to improve on to improve the transparency of credit scoring. Expect these issues to be resolved in the near future as FICO scores have proven to be beneficial to all parties involved in obtaining home mortgage financing.