For many people, paying down debt and improving your credit score comes even before trying to save for a down payment. There is not one minimum credit score needed to qualify for a mortgage. Your minimum score will vary depending on several factors. The two most important factors are which loan type you are applying for and the amount of your down payment. Here are typical minimum credit score requirements:
- FHA Loan – 580+ (500-579 possible but not likely)
- VA Loan – 620+ (some lenders allow 580)
- USDA Loan – 640+
- FHA 203K Loan – 620+
- Conventional Loan – 620+ credit score
However, don’t shoot for the lowest score possible because even if you do qualify, you’ll be charged a higher rate of interest.
How to Begin Improving Your Credit Score
The place to begin is by ordering a copy of your credit report from each one of the Big 3 Credit Bureaus (Equifax – www.equifax.com, Experian – www.experian.com, and TransUnion – www.transunion.com). It’s a bit ironic because the big 3 won’t give you you’re actual credit score but they are required to provide the detailed information that determines your score. There are several reputable websites that will provide your score free. Or for a small fee you can obtain it from www.myfico.com. Be sure to get your score from all 3 bureaus because they won’t all be the same and most lenders use the middle score. Also, all creditors don’t report to all 3 bureaus. Most only report to 1 or 2.
Go through each report line by line. There will almost certainly be errors in each report. Verify your name, Social Security number, current and previous addresses, list of employers, debts, and any public records concerning you. With I.D. theft being widespread, make sure you opened every single account that is being reported on. Also look closely at any delinquencies or defaults your creditors report. Even with automation, it’s not uncommon for creditors to have sloppy bookkeeping resulting in errors that are not your fault. You want to challenge every one of these.
It’s not uncommon to find severe enough errors to drag your score down a hundred or more points. That’s why you want to begin here because demanding the bureaus correct the errors might be all you need to do to qualify for a low interest mortgage. That’s correct, you have the right to demand the bureaus correct or verify any and all errors that you ask about in writing.
Send all of your correspondence through certified mail and keep copies for your records. Keep copies of everything the bureaus send back to you. In almost every case, the bureaus are a third party to the error. They only report back to you what your creditor reports to them. When the credit bureau cannot verify something you have disputed, they must remove it from your file. They only have 30 days to respond to you. If they don’t hear from your creditors, they can’t respond to you and have to remove the discrepancy in question (called a “derogatory”) from your report. Because of the volume of errors creditors and the bureaus make, they often can’t verify the information or no longer have it on file. Use this to your advantage.
After each questionable item is deleted, insist the credit bureau mail you a revised, corrected copy of your report for you to verify again. This is your first big step towards becoming a homeowner!
Building a Better Credit Score
There are dozens of ways to begin improving your credit score after you are sure that it is accurate. You should study up on the best techniques or possibly work with a reputable credit repair service. Be careful when selecting a credit repair service because many are motivated to continue collecting a fee from you that skews the techniques they use to repair your score as fast as possible. If you have the time and budgeting skills, you’re much better off doing this yourself. But you need to know what you are doing or you can make mistakes because this is not intuitive and doesn’t make good business sense in many cases. For instance, some consumers close old accounts that are dormant but in good standing. Don’t do this, an account in good standing is a positive even if not active. Also, it’s seldom a good idea to roll multiple smaller accounts into one big account. Your credit score is helped when you are only using 20% of your credit limit on multiple accounts rather than 90% on a single account. There are many big and little rules that you want to be aware of. Even a bankruptcy or any derogatory must come off your report after 7 years.
Finally, you need to decide how to pay off or reduce balances on active accounts. You don’t want to pay off all of your accounts because then you are no longer creating a current credit history. You’ll find your credit score improves the most when you have a few accounts (that your income can support) where you owe 20% to 30% of the credit limit. Something to know here is that neither you nor any credit repair services knows all of the rules that determine your score. The algorithm is FICO proprietary and has never been shared. Fortunately, via hundreds of millions of credit accounts, most of the rules have been reverse engineered. Once you study the most important rules, you’ll have no trouble obtaining a credit score that qualifies you for almost any low interest home mortgage.
Do you have any credit score tips to share? Please leave a comment.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 11 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.