For those interested in applying for an FHA loan, applicants are now required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently at around 3.5 percent.
If your credit score is below 580, however, you aren't necessarily excluded from FHA loan eligibility. Applicants with lower credit scores will have to put down a 10 percent down payment if they want to qualify for a loan.
If you are looking to qualify for lower interest loans or for a higher loan amount than you will want to take a few necessary steps to help improve your credit.
Timing: The time to think about this is at least 1 to 2 years before you start looking for a home. In the event you want to start sooner, than time is of the essence!
Here are a few things you can do today:
1. No more late payments!
Payment history makes up 35% of your score. If you have late payments, a good payment history will take time to rebuild. Start now by placing all of your regular payments on auto pay.
2. Pay Direct
If you can, pay any debts that are in collections directly to the creditor and NOT to the collection agency.
Use caution when paying collection accounts over 24 months old. If you make a payment the account then becomes active and can actually hurt your credit score.
Don't forget - medical bills can affect your score too.
If you pay something off ask for proof and file it away. That way if it is not reflected accurately on your credit report you can provide the necessary information to get it updated.
3. Establish Good Credit
Ask for help - If you have a family member with good credit, ask them to add you as an authorized user. Accounts that are older with high credit limits will help the most. This does not mean you have to have a credit card in hand. You are simply adding value to your credit history.
Reduce credit inquiries - Instead of seeking out credit cards wait for pre-approved offers to come your way. This way you can get a credit card without a credit inquiry. You can also take out a secured credit card with a small limit. Charge small amounts and pay it off every month.
Pay on time - Don't forget, when you get a bill, pay it on or before the due date.
Keep your credit card - When your credit is high enough and you feel the need to cut it up so you don't overspend - don't. The age of the account will help your score even if you have a zero balance so just tuck the card away instead.
Don't overspend - Keep you debt below 30% of your total credit if you can, although you can get a loan with as high as a 65% debt to income ratio.
4. Disputes
If you are disputing a charge or late payment that was due to something that was not your fault (and you can prove it), take it up with the creditor directly and ask them to remove it.
Do not dispute negative items on your credit report with the credit bureaus unless you have time to work it out (meaning you are not looking for a house this year). Lenders will often not close a mortgage until a dispute is removed.
For this reason, you should request that the credit bureaus cancel any disputes within the last two years.
Think You're Ready to buy a home?
Here are some addition considerations:
1. Do not make any major purchases. This is not a good time to buy that fancy new car you've been wanting!
2. No undocumented deposits into your personal bank accounts (until after you sign on your home).
3. It is a good idea to have your down payment in your account for 3-6 months or have your checks direct deposited to show proof that it did not come from a loan or other source that has to be paid back.
4. Start working with a good loan officer early to make sure you have the appropriate action items.
5. Other Options
Your lender can help with credit re-scoring as another viable option. This is a way to expedite resolving credit issues. It takes a minimum of 60 days and there is usually a fee involved.
Be warned - nine times of out 10 credit repair firms do more harm than good.
Credit repair firms cannot access the repository data directly, do not have the ability to interface with the bureaus directly, or to do their own “investigation” or issue their own “updated” credit reports. In other words they have “no standing” with the national credit bureaus”. Repair companies simply file disputes exactly in the same way a consumer model does.
For more information or to talk to a lender who can help with additional information contact me and I'll be happy to provide a few referrals.
In addition, here is a link to credit bureau and free credit report information: https://www.usa.gov/credit-reports