What is a Good FICO Score in This Economy?

Reader Question: I have heard that the "rules" about credit scores and home buying have changed because of the economic crisis. What is a good FICO score to have these days, if I want to apply for a mortgage loan and buy a home?

For the benefit of all readers, let me start by explaining some terminology. FICO stands for Fair Isaac Corporation, a company that does data analysis and "decision management" stuff. They created the FICO scoring model that is used to convert your credit report into a score.

This scoring system is used by Experian, one of the credit-reporting companies in the United States. There are two other companies who generate consumer credit reports -- Equifax and TransUnion. They each use a different scoring model to convert their reports into scores.

Actually, while writing this response to your question about good FICO scores, I checked out the websites of these companies to get some updated information. It seems that Equifax is now using the FICO system is well, but TransUnion is not. It can be a bit confusing, but don't worry ... here's what you really need to know:

When you hear somebody refer to a good FICO score they are talking about the score produced through the scoring model we just discussed. There are other types of scores generated through different systems (like the one you could get through TransUnion), but the FICO score is the one most commonly used by mortgage lenders. Most lenders will also consider one or both of the other scores as well. This is also why you will see offers for a "3-in-1" credit reports and scores -- you are being offered access to all three of your reports and scores.

Having a good FICO score will help you qualify for a home loan, because it's the number most commonly used by mortgage lenders in the U.S. And this brings us up to the question you started with -- What is a good FICO score in the current economy?

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It's true the definition of "good" has risen because of our economic crisis. You need a higher score these days if you want to qualify for the best interest rates on a mortgage. The FICO range goes from 300 to 850. I define a good credit score as one that allows you to (A) qualify for a mortgage loan and (B) get a decent interest rate on that loan.

There's a lot of flux in the mortgage industry right now (for obvious reasons, so it's hard for me to say where the qualification standard lies. But I can give you some insight into the score needed to get the best rates on your loan...

A couple of years ago, you probably could have qualified for the lowest interest rates on a mortgage loan with a FICO score of 650 or above. Today, however, that is no longer the case. In the current economy [and who knows what will happen six months from now], you would probably need a FICO score above 750 to qualify for the best rates on a loan.

Sure, you can probably get approved for a loan with a score between 650 and 750 right now, but you won't get the lowest rates. That means you'll be paying a bigger mortgage payment each month. So if you can boost yourself up above 750 before applying for a mortgage, you'll be in much better shape.

So what is a good FICO score in the current economy? I would say a 700 or above is a pretty good score and should allow you to get financing for a home. A 720 or above is even better. And if you can clear the 750 FICO range you'll be in great shape because you'll qualify for the best interest rates the mortgage lender has to offer.

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Posted on Friday, October 31, 2008 | Permanent Link