If you are thinking about buying a home, you are not alone. Interest rates are at all-time lows and to get in on the good rates, you must have good credit. To get an FHA loan you must have a FICO score of at least 640, and other mortgage loans want even higher FICO scores.
While you can obtain a loan with a lower credit score, you will pay dearly and have to go through what is known as a sub-prime lender. The sub-prime lenders will give loans, but they want more money down and also will give higher interest rates and ultimately higher payments. So what can a person do to get their credit score up and their interest rate down?
The first thing to do is to get a copy of your credit report and go over it with a fine tooth comb. There are some things not on the credit report that will not matter as much as others. For instance, a couple medical collections will not count against you near as much as a credit card payment that is past due.
The first area of the credit report to look at is the credit card debt, because you can ensure a mortgage company will. The more credit card debt that a person has, the harder it will be to get a new loan. All credit cards should be paid down to around 30% of the credit limit.
This will give a person the maximum points toward their FICO score and won’t cause any reductions. Pay down all balances and make sure that the cards are in good standing, like no late payments.
If there are small collections on your credit report, you need to pay them off. If you don’t have the extra cash to pay them off, then simply negotiate a deal with the debtor to make payments.
They should automatically update your credit report and show the payment status. If the debt is more than seven years old, don’t touch it. While it may be on your report, it may not be having a huge impact on your credit score.
If you call and want to pay off this bill or make a payment, it could reactivate it to a new status and further drive down the credit score.
One of the most common ways to quickly get a FICO score up is to identify any errors on your credit report. Just because it is on the credit report doesn’t mean that it is factual information. In fact, many people find at least 1-2 errors on their credit reports that are dragging down their score.
You have a right to dispute these charges and to allow the company to either verify the debt or to remove it. If you don’t hear from a dispute within 30 days, the credit bureau has to automatically remove the ding to the report. This is an easy way to boost credit scores.
All the repairs and payoffs can take 2-6 months to make a difference on the FICO score. If you want to buy a house, start cleaning up the credit report at least 6 months to a year in advance to ensure that by the time you’re ready to sign, you get the best interest rate possible.