Bad Credit Mortgages: Understanding the FICO Score

If you have bad credit and are shopping for a home loan, you may feel like Rocky Balboa the first time he sized up the boxer, Ivan Drago. You can almost imagine a lender muttering, "I must break you." Like Rocky, you're not going down without a fight. Strap on those gloves and get ready to start thinking strategy-FICO strategy, that is. FICO score defined Your FICO score, also known as your credit score, is a number that represents how risky you are as a borrower. The number is calculated from your credit history, as reported by the three credit bureaus: Equifax, Experian, and TransUnion. Each bureau is likely to have a slightly different set of information on you. This means that you may have three different scores. While the exact FICO formula is confidential, relevant factors include: • How quickly you pay off your credit balances • Whether you pay on time • How much credit you use relative to how much you have available The FICO scale ranges from 300 to 850, with a higher number meaning less risk for the lender. Less risky borrowers get the lowest rates and best terms. Riskier borrowers pay higher interest rates and are given more restrictive terms. Bad credit mortgage loans Many people with lower credit scores, say between 500 and 620, can obtain a mortgage or mortgage refinance, despite the credit problems. Some lenders actually specialize in these borrowers by offering what's known as "bad credit mortgages" and "bad credit loans." Managing your FICO Improving your FICO score is not only possible, it should be your goal. Even small improvements may lower your rate or increase the chances of your loan being accepted. Use these tips to micro-manage your score before filling out that loan application. • Obtain your credit reports and review them for accuracy. Have all inaccurate information corrected immediately. • Put off any further credit purchases until after your loan closes. • Request credit limit increases (but don't spend it). • Avoid opening new credit accounts; this is an indication that you're short on cash. Are you still wearing those boxing gloves? No matter-bad credit or not, you're ready to enter the mortgage ring to get things started.