Your credit score or FICO score is used by mortgage lenders to determine how much of a risk you are for lending. The name “FICO” comes from the name of the company that scores you. Your FICO score originates from the Fair Isaac Corporation and is a numerical representation of the contents of your credit history.
Your FICO score is derived from the following information in your credit files:
• 35% is based on your history of on-time payments
• 30% is based on how much you owe
• 15% is based on the duration of your credit history
• 10% is based on the how much new credit you have
• 10% is based on the types of credit you use
Your credit records are maintained by three separate credit agencies and you will have three corresponding FICO scores. If there is inaccurate information in your credit reports, your FICO score suffers. The lower your FICO credit score, the harder it will be for you to be approved for mortgage refinancing and you will pay a much higher interest rate. Before shopping for mortgage refinancing it is important to request copies of your credit history from each of the three credit agencies and carefully review your records for errors.
How to Improve Your FICO Score
Credit repair is a slow process; it takes time and effort on your part. There are steps you can take to improve your FICO score before applying for mortgage refinancing. To improve your FICO score as quickly as possible focus of the following areas of your finances:
• Make Sure You Pay All Your Bills on Time
• Maintain Low Balances on Your Credit Cards; Less Than 30% of Your Limit
• Pay off or Settle Any Negative Information in Your Credit History
• Dispute any Errors You Find Quickly
Mortgage Refinancing with a Low FICO Score
Having a low FICO score will not necessarily prevent you from refinancing your mortgage; it simply means you will pay more for that loan. If you invest the time to research lenders and do your homework it is possible to qualify for interest rates comparable to what homeowners with good credit pay. Depending on the severity of your credit problems, a mortgage broker could be excellent resources for finding competitive interest rates. You have to be careful when working with a mortgage broker because brokers inflate interest rates to make a profit.
You can learn more about your mortgage refinancing options, ways to improve your FICO score, and how to avoid costly homeowner mistakes by registering for our free mortgage tutorial: “Five Things You Need to Know before Refinancing Your Mortgage.”