Numbers Count: FICO scores drop on approved mortgages
Numbers count. They matter to bankers and to prospective homebuyers, sellers, and real estate professionals. Here’s my take on the key numbers on the housing market this week.The numbers: The average FICO score on closed mortgage loans fell to 722 in October — the fifth straight monthly decline since May, when the average was 730, according to Ellie Mae’s monthly Origination Insights Report. What counts: The steady decline in FICO credit scores on approved mortgage applications indicates lenders are loosening their underwriting. But remember that lenders base loan approvals on numerous factors, such as your total debt payments relative to your total income — known as a debt-to-income ratio.
If you’re thinking of applying for a mortgage, or just want to manage your finances more effectively, it is good to know the factors that typically go into a FICO score: payment history, amounts owed, length of credit history, new credit, and credit mix.
- Payment history: This is typically the most important factor in your credit score because a lender wants to know if a potential customer has paid past debts on time. Tips: Pay your bills on time, and if you miss a payment or are late for whatever reason get current as quickly as possible.
- Amounts owed: Owing money is not a bad thing, but maxing out 10 credit cards might be. Your credit score takes into account total available credit and what percentage of that total is being used. Tips: Keep low balances on credit cards, and remember closing unused cards may lower your credit score because that lowers your total available credit.
- Length of credit history: Your FICO score takes into account the age of your oldest credit account and newest account and the overall average age of all your accounts. Generally, a longer credit history increases your credit score. Tips: Be smart about opening new credit accounts, and think twice about closing old unused accounts since that will lower the average length of your credit history.
- New credit: Opening multiple credit accounts in a short time may be perceived as risky and may lower a person’s credit score. Tip: Avoid opening new accounts that you may not need.
- Credit mix: Although not a major factor, a FICO score does consider the variety of credit a person uses, such as credit cards, auto loans, and mortgages. Tips: Having a credit card may help your FICO score — but only if you manage your debt responsibly and make payments on time. Don’t add accounts just to try to raise your credit score.
For a more detailed look at FICO Scores and managing credit, check out this guide.
The bottom line on credit scores, in my opinion, is they are an indicator of smart money management. It is useful to understand the components of a credit score, but it is more important to develop sound habits for managing credit and money generally.