One of the biggest misconceptions about buying a home is that you need perfect credit in order to qualify. In fact, many programs allow much lower credit scores when qualifying a home buyer. But there are still certain minimums that you have to meet. So, how do you go about improving your credit scores?
Home loans that are insured by different departments of our federal government (FHA, VA and USDA) all allow lower credit scores with almost no impact to the interest rate. On the other hand, a conventional loan through Fannie Mae or Freddie Mac will most certainly result in a higher interest rate with lower credit scores.
But what if you have some credit – enough to create a credit score – but that score isn’t high enough to qualify? Yes, we can help people get an FHA loan or a VA loan with a 580 score, or a conventional loan with a 620 score, or even a USDA loan with a 640 score. But what if your scores are lower than that?
One of the easiest things you can do to improve your credit score is to get the balances of your revolving accounts below 30% of that account’s credit limit. This represents up to 30% of your overall credit score.
Here’s an example: If you have a VISA account with a $1,000 credit limit and a $800 balance, you are utilizing 80% of that account’s capacity. Your score will suffer because you are almost maxed out. By throwing $500 at that account and getting your balance down to $300, your utilization is at 30% of your credit limit and your score will go up.
By the way – 30% utilization is the magic number. You don’t have to pay off the account – just get the balance down to 30%.
The same thing happens with your account with a $10,000 credit limit. If you have an $8,000 balance, you are at 80% utilization, and your score is getting hit. Paying that account down to $3,000 will get your utilization down to 30%, and your scores will go up.
But notice that it takes a lot more dollars because your credit limit is higher. This is why you should always start with your lowest credit limit cards. The scoring algorithm doesn’t care what the credit limit is. It only cares that you carry a low balance relative to the credit limit amount.
The other way to improve your credit score is to simply make your payments on time, or at least no more than 30 days late. In the chart above, you’ll see that your payment history represent 35% of your credit score.
Between your payment history and your utilization, you can easily control 65% of the factors that go into your credit score.
One note: If you don’t have any credit score at all, it’s possible that you may qualify for an FHA mortgage. To do that, you will need to prove that you manage other payments accounts correctly – accounts such as your rent, power bill, cable bill, cell phone bill and your garbage bill. So, before you go about improving your credit score on your own, contact me first, and let’s see if you may qualify for an FHA mortgage.
And if you have some credit history, but not enough, then the above steps may not help either. In that case, improving your credit history may be what’s needed.
Otherwise, follow the above steps on improving your credit scores, and you should be in fine shape before you know it.
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