With the 2012 holiday season behind us, it's that time again when everyone sets to work on those New Year's resolutions. If you haven't done so recently, now might be the perfect time to take a good, hard look at your FICO credit score. There are two main criteria that mortgage lenders look at when determining if you are a good candidate for a loan; one is your debt to income ratio and the other is your FICO score. In general, FICO scores range from 500 to 800. Mortgage lenders generally consider a score above 680 to 720 as acceptable. This being said, the average FICO score on a new mortgage is 750. Whether buying a new home is on your to-do list in 2013 or not, it's important to be aware of your credit score and how to go about improving it.
Below you'll find some great advice from Bob Waun of Bankers Home Loan on how to improve your FICO credit score and thus, put yourself in a better position to buy a home.
1. Know what's on your credit report
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Everyone makes mistakes, even credit bureaus. You are entitled to a free credit report at www.annualcreditreport.com once a year. This is a government-sponsored website and the inquiry does not negatively affect your credit score (unlike creditor inquiries). So take advantage of this opportunity to review your credit report and make sure everything checks out.
However, do not use www.freecreditreport.com which is a business that sells your personal information to advertisers.
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Disputing any errors you do find takes time. Additionally, an open dispute can lead a mortgage lender to deny your home loan request because it is seen as an open question about the validity of the entire report. If you are going to dispute items, resolve these before applying for large purchases on credit.
2. Too many inquiries can lower your FICO score
Yes, this is true, but a couple of inquiries in 90 days will not permanently damage your good credit standing. This myth about inquiries has been propagated by lenders who want to discourage consumer shopping. Rate shop in a specific period of time and don't apply for unneeded credit.
3. Consolidate debt and reduce the amount you owe
This may seem obvious, but it is the most common reason for a low FICO score. To lenders, multiple credit cards with small balances looks like a pattern of willy-nilly borrowing.
You should strive to consolidate or pay off these minor charges and show the small accounts as “closed, paid as agreed.” However, note that closing accounts does not make them just go away, most credit line items will stay on your report for 7 years.
4. Address and resolve credit issues
If you have a credit issue, engage the lender and get it resolved. That $20 DTE collection account from 2009 is damaging your credit as much as not paying your car payment. The little items have weight on your FICO score and can often be resolved with a phone call and letter. Get all resolutions and pay-off agreements sent to you in writing by fax or email, while you are on the phone line with the lender.
This may all seem overwhelming! Like with anything, take it in small "baby steps" and you'll be well on your way to improving your FICO score and getting you into the home of your dreams! As always, please feel free to contact either Lori Acker or myself with any questions. Happy 2013!
