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The Difference Between FICO Score and Credit Score: How It Affects Your Mortgage and Rates

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When applying for a mortgage, your creditworthiness plays a significant role in determining your loan approval and interest rates. Two commonly referenced terms are FICO score and credit score, which are often used interchangeably but have distinct differences.

1. What is a Credit Score?

A credit score is a broad term that refers to a numerical representation of a consumer’s credit risk. It is calculated based on various scoring models, including FICO and VantageScore, and is derived from credit report data such as payment history, credit utilization, and length of credit history.

2. What is a FICO Score?

A FICO score is a specific type of credit score developed by the Fair Isaac Corporation. It is the most widely used scoring model by mortgage lenders. FICO scores range from 300 to 850 and are calculated based on five key factors:

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • Credit mix (10%)
  • New credit inquiries (10%)

3. How Do They Affect Your Mortgage?

  • Interest Rates: A higher FICO score typically qualifies you for lower mortgage interest rates, while a lower score may result in higher rates or loan denial.
  • Loan Approval: Lenders often have minimum credit score requirements, and FICO scores are a primary factor in the underwriting process.
  • Loan Terms: Your score can affect down payment requirements and loan programs available to you, such as conventional, FHA, or VA loans.

4. Key Differences

  • Scope: Credit scores can come from various models, while FICO is a specific scoring model.
  • Usage: Most mortgage lenders rely heavily on FICO scores for risk assessment.
  • Impact: Your FICO score has a direct influence on mortgage rates and loan eligibility.

Understanding the distinction between a FICO score and a credit score is essential when preparing for a mortgage application. By improving your FICO score, you can increase your chances of securing better loan terms and lower interest rates.

Navigating Mortgages as a Self-Employed Professional

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Securing a mortgage as a self-employed professional can be more challenging than for traditional W-2 employees, but with the right preparation and documentation, it is entirely achievable. Here’s a guide to help you navigate the process:

  1. Document Your Income
    Lenders need to assess your financial stability and income consistency. To do this, you’ll need to provide:
    • Tax returns for the past two years
    • Profit and loss statements
    • Bank statements
    • Client invoices or contracts
    • Consistency is key, so showing steady or increasing income over time strengthens your application.
  2. Manage Your Tax Returns
    Many self-employed individuals minimize their taxable income through deductions, but this can reduce the income lenders consider when evaluating your mortgage application. It’s essential to strike a balance between tax savings and showing sufficient income for loan qualification.
  3. Boost Your Credit Score
    A strong credit score can offset some of the challenges associated with self-employment. Pay down debt, make timely payments, and avoid opening new lines of credit before applying for a mortgage.
  4. Increase Your Down Payment
    A larger down payment can make you a more attractive borrower. It reduces the lender’s risk and can help you secure better interest rates.
  5. Work with a Mortgage Professional
    Partnering with a mortgage originator who understands the unique needs of self-employed borrowers can make a significant difference. They can help you find lenders that specialize in working with non-traditional income streams.

While obtaining a mortgage as a self-employed professional may require additional effort, proper documentation, financial management, and the right guidance can help you achieve your homeownership goals.

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100 Independence Place, Ste. 308
Tyler, TX 75703