Capital is the lifeblood of a real estate investor. And the cost of that capital can mean the difference between positive and negative cash flow. Mortgage lenders will set that cost based on your credit score. In this article, we’ll look at the most widely used credit score and its impact on mortgage interest rates.
Your FICO Score by Comparison
The most widely used and recognized credit score is the FICO score. Developed by the Fair Isaac Corp. in California, the FICO score ranges from a low of 300 to a high of 850. More than half of all FICO credit scores fall above 700, as this table shows:
Factors Impacting Credit Score
The FICO credit score is calculated using several categories of data from your credit history. Payment history is the single most significant factor, accounting for 35% of your credit score. New credit and types of credit used have the least impact, each accounting for 10% of the FICO score. Here are all of the factors and the percentage impact they have on a credit score, as reported by Fair Isaac:
Impact of Credit Score on Interest Rates
Your credit score can have a major impact on the interest rate you’re charged. The Fair Isaac website provides a tool for determining mortgage interest rates based on FICO score on a national or state average. As shown below, a borrower falling into the lowest credit score range can end up paying twice as much or more as one who has a high credit score.
In subsequent articles we’ll look at factors that lower your score and what you can do to improve it.
{ 3 comments… read them below or add one }
Excellent description of FICO scores and their effect on interest paid for real estate. The pie chart was very useful to see the various components that go into the score.
Well written article. I like the charts and graphs.
FICO = I love debt score. Who cares about FICO you don’t need it. Don’t be fooled you can get a mortgage without a FICO. Do your home work. Read Dave Ramsey.