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Credit tips for prospective home buyers

Decide to become a homeowner and, inevitably, you'll have to confront your credit score. You can try to improve your odds of qualifying for a home loan by saving more for a bigger down payment, but your credit score is the most important factor in determining what interest rate you'll pay — or whether you qualify for a mortgage at all. Associated Press

What is FICO?

Your credit score, or FICO score, is derived from your history of taking on debt and paying it off. Make the wrong financial move in the weeks or even months before you sit down to buy that dream home and you could end up paying a lot more for your loan.

FICO scores range between 300 and 850. The national median FICO score is around 720-723, according to Fair Isaac.

Unless you are a first-time buyer or have a large down payment, lenders will want to see a FICO score of 680 or higher, says Robert Satnick, chairman of the California Mortgage Bankers Association and CEO of Prime Financial Services in Van Nuys, Calif.

See where you stand

The reports show how much you owe, what kind of debt you have, and your bill-paying habits. They also show any serious credit problems, such as a bankruptcy. How your FICO score is generated depends on your credit history, which is collected by three major credit reporting agencies: Equifax Inc., Experian Group and TransUnion LLC.

To get the FICO score mortgage lenders use when they evaluate your loan, go to myfico.com, a unit of Fair Isaac. Obtaining a FICO score and credit report from one of the credit bureaus costs $15.95; the combination of all three scores and reports costs $47.85.

Customers can get a free credit report from each of the three credit reporting agencies once a year — www.annualcreditreport.com — but FICO scores are not included.

What affects your score?

The factors are: payment history (35 percent of the score), amount owed (30 percent), mix of credit and installment loans (10 percent), length of credit history (15 percent) and new credit applications. (10 percent).

The weight of variables can vary depending on the makeup of each person's credit file.

How to handle errors

Sometimes errors creep into the credit reporting agencies' records, and these can take weeks or months to fix, especially if the mistake shows up on more than one report.

The credit bureau reports typically include reasons why a credit score isn't higher.

Some issues can be addressed quickly, like paying down balances, but there's no quick fix for derogatory items still on file. Only time can wipe those away.

Generally, the more recent a blemish, the more it will pull down a credit score.

Experts also warn against closing accounts suddenly in an attempt to improve one's score. That merely narrows one's available credit and, depending on how much debt one has, hurts their score, says Virginia "Ginny" Ferguson of the National Association of Mortgage Brokers' credit scoring committee.

How to improve your score

Credit experts say the single best way to improve one's credit score is to make payments on time and keep credit balances at 30 percent or below your total available credit.

People with department store credit cards, in particular, can be susceptible to taking negative hits on their credit score because those cards typically don't have a grace period for repayment and companies will report consumers as late to the credit bureaus even after only one day.

Being reported as past due can whack off 100 points from a credit score, warns Virginia "Ginny" Ferguson, who chairs the National Association of Mortgage Brokers' credit scoring committee. Maxed-out credit cards are another red flag.

So, if possible, aspiring home buyers should pay down or pay off their credit cards, and avoid big credit purchases.

Credit tips for prospective home buyers 02/13/09 [Last modified: Friday, February 13, 2009 3:49pm]

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