FICO scoring formula impacts couple's mortgage quest
By Erica Sandberg
November 5, 2015
Hi, Other Erica!
I got married last year. We put most of the wedding expenses on my three credit cards (what we couldn't pay with debit savings). We just paid everything off. We are going to buy a house soon, I hope, but my FICO scores are funny. I thought mine would be lower because of the balances that reached over $10,000, but if you can believe it, mine are all over 800, and my husband's are 720. What happened? This seems kind of crazy to me. Thanks! — Erika
FICO scores were developed for lenders, so they can make smart — and snap — judgments about applicants. Consider them as you would letter grades in high school. A college wouldn't want to look at all the tests and assignments you completed throughout the four years you were enrolled. That would be terribly time-consuming and rife with potential errors! Instead, the college would want to check the final grades you earned in those classes, as they're a condensed version of your accomplishments.
The components of your scores, in order of importance, will tell lenders:
- Have always paid your bills on time.
- Aren't in over your head with too much debt already.
- Have demonstrated financial responsibility for many years.
- Know how to use a variety of credit products.
- Aren't hitting up every Tom, Dick and Harry for money.
Sensible criteria, right? After all, if you were to consider someone for a loan, this list is probably what you'd value, too.
When you added those substantial wedding costs to your credit cards and then deleted thousands of dollars so quickly, you proved your exceptional credit management skills. All that activity was recorded on your consumer credit reports and calculated into your FICO scores.
Your husband, on the other hand, did not add as much impressive data to his credit reports. And that's OK, because although his scores aren't quite as amazing as yours, they're still on the high end of the spectrum. If he wants to race you to the top he can and maybe even should, as the effort may pay off in a better mortgage for the two of you. For a home loan, FICO scores in the mid-700s and above are ideal, as they're a strong indicator of a low-risk borrower.
For your husband to push his scores higher, he'll need to add more positive activity to his credit reports. That means paying off any balances and keeping all his cards active by charging and repaying in full regularly. If he made some late payments or defaulted on some loans in the past, they're being negatively factored in to his scores, but time will eventually heal those wounds.
Check your credit before house-hunting. At least six months before applying for a mortgage, pull your credit reports (free from AnnualCreditReport.com) to make sure errors aren't spoiling your FICO scores. They can take a while to clear up, so don't leave it until the last minute.
Also be aware that when you apply for a mortgage as a couple, the lender will assess your total household income and combined liability load. There are three credit reporting agencies, and each will have its own FICO score. The lender will use the middle scores from each of you, and the lowest of those scores should factor in determining the terms of the loan.
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