Definition: FICO stands for the corporation that developed it: Fair Isaac Corporation, named in 1956 after its founders: Bill Fair, an engineer, and Earl Isaac, a mathematician. It's a complex credit-scoring formula that assesses the risk a borrower may default.
The first credit bureau-based credit scoring system was introduced by Fair Isaac in the mid-1980s, but it did not really take off until 1995 when two major companies, Fannie Mae and Freddie Mac, which purchase almost two out of every three real estate loans, recommended that lenders use FICO scores.
Today it is impossible to obtain a mortgage without the lender assessing your FICO score. The popular desktop underwriting program from Fannie Mae automatically includes your top 3 FICO scores from the three credit reporting agencies: Equifax, TransUnion, and Experian. This is a reason that sometimes agents will advise sellers to request a copy of the buyer's DU so they can view the FICO scores for themselves. A buyer needs to give permission for a lender to release the desktop underwriting file to a third party.
Lenders establish minimum FICO scores to make a loan. Some FICO scores are borderline low, and lenders charge accordingly. Some first-time homebuyers will have a hard time finding a lender who will make them a loan if their FICO score falls below 600. The higher your FICO, the lower your interest rate and fees. When you see interest rates quoted on certain websites, those are typically reserved for good FICO scores.
Don't despair or give up if your FICO score is low and the lender rejects your mortgage application. There are ways to improve your FICO score, and some mortgage lenders can refer buyers with less than stellar credit to a company to repair it. Make sure you get a referral from the lender to the credit repair company, though, because some of them are ripoffs and don't actually improve your credit score.
To improve your credit score, try paying off large balances, and start with the largest amount first. If all of your credit cards are maxed, that will reduce your FICO score. You need a healthy gap between the amount you owe and your credit line amount.
Don't open any new lines of credit and don't close old lines of credit without talking to your mortgage lender. If you don't have any credit cards, you might not have a FICO score. Try establishing credit a year or so before you begin looking at homes for sale.
Don't ever be late on a payment. Being late on a payment is called a derogatory and the more derogatories appearing on your credit report, the lower your credit score. Maintaining and protecting your credit is a principal you might not be taught in school or at home, but it is paramount to buying a home. It can mean the difference between buying a home or not being approved for a mortgage at all.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
Pronunciation: F-eye Coh
Also Known As: Credit Score
Examples: Because Mary's FICO was 750, the lender considered Mary to be an excellent credit risk and let Mary borrow money at an extremely low-interest rate, reserved for high FICO score customers.