Home buyers need good credit score even with big down payment

By Sandra Block, USA TODAY


Five years ago, if your application for a mortgage included a 20% down payment, your bank would have approved your loan by sundown and sponsored a parade in your honor.

But in this new era of tight credit, having a big down payment no longer guarantees you'll qualify for a mortgage. Starting this week, mortgage finance giant Fannie Mae will require borrowers to have a credit score of at least 620. Previously, the cutoff was 580.

Fannie Mae buys loans, providing an important source of financing for lenders. For that reason, its guidelines are considered the gold standard for mortgage loans. Most banks are expected to adopt the new standards, if they haven't already.

"Credit scores have never mattered quite as much as they do now," says Bob Walters, chief economist for Quicken Loans.

In addition, Fannie Mae won't approve loans for borrowers if more than 45% of their gross monthly income goes toward debt, even if they have a big down payment. Fannie Mae didn't disclose the previous debt limit, but it was higher than 45%, says Fannie Mae spokesman Brian Faith.

The higher standards could frustrate buyers hoping to take advantage of low interest rates, depressed home prices and generous tax breaks that were recently extended until next spring. Even buyers who qualify for a mortgage may find that they're ineligible for the best rates because lenders have tightened their standards across the board, says Gerri Detweiler, credit adviser for Credit.com.

If you've already found a home you'd like to buy, there's not much you can do to raise your score before you apply for a loan. But if you're just starting to tour open houses, there are steps you can take to improve your credit profile, including:

„Review your credit reports for errors. Go to AnnualCreditReport.com and order your credit reports from the three main credit-reporting bureaus: Experian, TransUnion and Equifax. You're entitled to a free credit report once a year from all three of the bureaus, but only if you go through this website.

Once you receive your credit reports, go through them and look for inaccurate information, such as accounts you never opened. All of the credit bureaus provide a process to dispute errors, says Craig Watts, spokesman for Fair Isaac, which created the widely used FICO score.

„Pay off credit cards and other debts. One of the factors used to calculate your credit score is your "credit utilization ratio," which measures the amount of credit you have outstanding vs. your total available credit. This ratio accounts for 30% of your score. Paying off balances will increase the amount of unused credit you have available, which will help your score.

But even if you've decided never to use credit cards again, don't close your accounts. Closing a credit card account won't help your credit score and could hurt it, Watts says. When you close an account, you reduce the amount of your available credit, which could hurt your credit utilization ratio.

„Avoid opening any new accounts. "Every new account you open is likely to drop your credit score, at least a little," Watts says.


Checking your score


When you order your free credit reports from AnnualCreditReport.com, your credit scores aren't included; you'll have to pay a fee to get them.

In recent months, though, several services, such as Quizzle, Credit Karma and Credit.com have launched programs that provide free credit profiles. These websites can provide a useful snapshot of your credit standing and provide tips on how to improve it, Detweiler says.

If you're planning to buy a home a year from now, she adds, it doesn't make sense to spend a lot of money to buy scores that could change by the time you apply for a loan.

But house hunters who plan to apply for a loan in the next few weeks should know their actual FICO scores, because that's the score most potential lenders use, Detweiler says.

You can buy your FICO score and credit report from TransUnion and Equifax at www.myfico.com for $15.95 each.

Earlier this year, Experian stopped selling to consumers the FICO scores it provides lenders, Watts says. You can buy a credit score based on Experian's own scoring model for $15 at www.experian.com. Experian's website also promotes a "free credit report and score," but to get this deal, you must enroll in a credit-monitoring service that costs $14.95 a month.


Typical factors that influence your FICO credit score:


Payment History –                  33%

Amounts Owed –                     30%

Types of credit used -             10%

New credit -                             10%

Length of credit history –        15%