In these rough times of the mortgage crisis, buyers are finding it increasingly difficult to find a home loan. Lenders are tightening loan guidelines and scrutinizing applications like never before. Actually, they are scrutinizing applications like they should have before! One recent client applied for a loan and was surprised to find out what her credit score was. I won’t say whether this client was surprised good or bad, but the client did ask how credit scores are determined. Great question!

Most lenders use what’s called a FICO score to assess an applicant’s credit score. In case you’re wondering, the FICO score is developed by Fair Isaac Corp., hence the name. FICO scores will range from 300 to 850 with higher scores being a better credit rating. So here’s how a FICO score is generally broken down:

35% Payment history
30% Amounts owed
15% Length of credit history
10% New credit
10% Types of credit used

Each of the three credit bureaus (Experian, TransUnion, and Equifax) will determine their own FICO score with a lender typically going with the middle score. So what’s that all mean? If you are looking to buy a home in the near future, consult a lender or your financial advisor to determine what your FICO scores are. Helping to pay off certain debts can raise your credit score and help with your loan application.

Source: Realtor Magazine Online (12/04/07) citing Pamela Yip, Dallas Morning News (12/03/07)