To avoid another melt down, many lenders have tightened their mortgage requirements. According to a report by the Federal Reserve, banks are less likely to offer loans to people with a FICO score of 620 and a 10 percent down payment than they were in 2006. Lenders were also less likely to do so even for those with a score of 720. So how do you qualify for a mortgage? Raise your FICO score!
Credit scores are rising as people reduce debt and spend less in this tight economy. Eighteen percent of Americans now have scores of 800 to 850, while 15 percent are below 550, according to FICO data.
Lenders review FICO scores from the three big credit agencies and use the middle number, to which becomes the borrower’s risk number. (Go to www.annualcreditreport.com to get your free annual copy of all three credit scores.)
The two biggest factors in a credit score are payment history, which accounts for 35 percent of the score, and the amounts owed, accounting for 30 percent.
Knowing that information, one can raise his/her credit score by reducing balances on credit cards. However, if an account is in collection, it is too late to improve the credit score by paying it off. The notation that an account is in collection is what lowers the score, so consumers may get more mileage by paying down active credit-card balances and other debts first.
Though mistakes and bankruptcies may stay on a credit report for seven years, lenders will generally be more likely to overlook late payments that happened two or more years ago than more recent ones.
Improving one’s credit score could take three to four months, or it could take as long as 18 months.
The bottom line? A smart consumer is a better buyer.