This is something that keeps coming back and is very important. Your credit score will allow you to either get the best rates possible (scores over 740) or maybe not get a loan at all (scores under 620-640). In the past as long as your lender was able to get an underwriting approval (desktop underwriting), your score didn't matter. Over the last couple of years, your score has become more important than ever.
We are seeing more and more investors requiring a minimum credit score of 640 for FHA loans. It was 580, then went to 620 and now most are requiring 640. For a conventional loan you will usually need at least a 660.
So how do you improve your score? First of all, look at your report, make sure everything is accurate. If your score is low, typically something happened like:
- You defaulted on a loan and it went to collection.
- You have been late on payments, probably more than one.
- You have "maxed out" your accounts and used all the available credit.
- You have had a repossion, foreclosure or bankruptcy.
Once you know that the information reported is accurate, the next step is to fix it. There are many credit repair companies out there. The biggest problem is finding one that is reputable. You can fix your report yourself, it just takes time. The biggest thing is to make sure all your payments are on time. If you have collections, pay them off, get a letter showing it is paid and send it to the credit bureau. Time heals late payments, bankruptcies, foreclosures and any other issues on your credit report.
If you have a bankruptcy or foreclosure, make sure you re-establish your credit. Get a small credit card, use it and make sure you make all your payments on time. Lenders want to see that you have established new, good credit. Typically to show a valid credit score, you will need a minimum of four accounts, remember that as you establish new credit.
Don't close old accounts, especially those with a good credit history. If you close accounts, you have lowered your available credit and it will hurt your credit score. The credit score is based on length of time that the account has been open, payment history and amount of available credit.
Once you have improved your credit score, make sure you keep the new habits! Keep your score high and it can help with insurance premiums, employment plus it will make it easier next time you want to buy a new home!
