6 Reasons Why Your FICO Score Could Suddenly Drop
If you’ve ever applied for a mortgage, chances are you’ve heard of the term ‘FICO score’.It’s a three-digit number that reflects your ability to pay back a loan; The bigger the number, the easier it is for you to take out a mortgage because you’re seen as less of a default risk compared to others!
FICO scores are calculated using five weighted factors—and sudden shocks to any of these can cause your score to fall without notice. With this in mind, here’s a look at 6 reasons why your FICO score could suddenly drop in the context of home loans.
1. You’ve Recently Finished Paying Back a Home Loan
Did you know your FICO score can suddenly fall if you finish paying back your mortgage? This might seem counterintuitive, but it makes sense if you look at things in the context of credit diversity!
The various types of debt you hold (such as home loans, credit cards, car loans, and so forth) are collectively referred to as your ‘credit mix’. Credit mixes make up 10% of your FICO score—so if you pay back your home loan, you suddenly have one less facility in your credit mix, and your FICO score falls.
2. You’ve Just Taken Out aNew Mortgage
Alright, this is where things get a bit tricky. If paying back your home loan causes your FICO score to drop, why does it drop when you take out a new mortgage? Don’t you add to your credit mix by taking out a home loan?
While your credit mix does improve by taking out a mortgage, you now owe a bigger amount to lenders. This is crucial to understand because ‘amounts owed’ accounts for a bigger portion of your FICO score than ‘credit mix’. Put simply, 10% of your FICO score rises when you take out a new home loan (due to a credit mix expansion), but 30% of it falls due to more amounts owed. This results in a net decrease!
3. You’ve Opted for Mortgage Refinancing
Another factor that could cause your FICO score to drop all of a sudden is if you refinance your home loan. According to consumer credit giant Experian, mortgage refinancing signals to lenders that you’re willing to take on more debt without proving you can pay it back on time. This makes you appear riskier and causes your FICO score to decrease.
Having said this, mortgage refinancing normally causes a temporary drop in your FICO score, provided you pay back the subsequent premiums. Once you start making regular payments on time, your FICO score will shoot up because your ‘payment history’ (which accounts for 35% of your FICO score) will grow in strength. What’s more, if you end up paying a bigger home loan back, your FICO score will increase by a greater amount than if you paid back your initial, smaller loan!
4. You’ve Defaulted on Multiple Credit Accounts Simultaneously
Remember how we mentioned your credit mix reflects the various types of debt you hold? Expanding your credit mix is conducive to building up your FICO score, but the opposite happens if you default on multiple debt accounts simultaneously.
Think about it from a mortgage lender’s perspective: if you’ve got a client with 5 credit accounts (one of which is their mortgage) and they miss payments on every account except for their home loan, what would your likeliest response be? Chances are you’d expect them to default on the 5th account at some point soon—and this is why your FICO score drops if you default on multiple debts at once.
5. You Don’t Have a Lengthy Credit History
How long has it been since you first took out a loan? The answer to this question could determine how quickly your FICO score drops if you default on a mortgage payment!
Factors such as the age of your credit accounts make up 15% of your FICO score. Therefore, if you’ve only just taken out a mortgage and you’ve rarely bought things on credit, your FICO score is highly likely to drop in the event of a default. In comparison, if you’ve got a lengthy credit history and you miss a payment, your FICO score won’t drop as quickly.
6. You’ve Made Several Late Mortgage Repayments
What happens to your FICO score if you’re late in paying back a premium? If it’s the first time it’s happened, chances are there won’t be many consequences (there are countless reasons why someone could miss a payment). However, if you’ve made several late repayments, your FICO score is likely to drop because your payment history will take a massive hit.
Remember—mortgage lenders use FICO scores to ascertain their clients’ default risk. Unfortunately, if you keep making late payments, your FICO score will drop because lenders will think it’s only a matter of time before you default completely.
Atlantic Home Capital Provides Home Loans to Clients From Every FICO Score Tier
If you’re under the impression you can’t get a home loan if your FICO score has suddenly dropped, our team of mortgage consultants at Atlantic Home Capital is ready to prove otherwise!
We issue all kinds of mortgage loans to clients from all five FICO score tiers. From FHA loans for borrowers with modest FICO scores to investment property and jumbo non-conforming mortgage loans to those with high FICO scores, we’ve got it all!
Send us a message now to find out what kind of home loan you qualify for based on your FICO score from some of the most seasoned mortgage brokers in Fort Lauderdale!
