Five years ago,if your application for a mortgage included a 20% down payment, your bank wouldhave approved your loan by sundown and sponsored a parade in your honor.
But in this newera of tight credit, having a big down payment no longer guarantees you'llqualify for a mortgage. Starting this week, mortgage finance giant Fannie Maewill require borrowers to have a credit score of at least 620. Previously, thecutoff was 580.
Fannie Mae buysloans, providing an important source of financing for lenders. For that reason,its guidelines are considered the gold standard for mortgage loans. Most banksare expected to adopt the new standards, if they haven't already.
"Creditscores have never mattered quite as much as they do now," says BobWalters, chief economist for Quicken Loans.
In addition,Fannie Mae won't approve loans for borrowers if more than 45% of their grossmonthly income goes toward debt, even if they have a big down payment. FannieMae didn't disclose the previous debt limit, but it was higher than 45%, saysFannie Mae spokesman Brian Faith.
The higherstandards could frustrate buyers hoping to take advantage of low interestrates, depressed home prices and generous tax breaks that were recentlyextended until next spring. Even buyers who qualify for a mortgage may findthat they're ineligible for the best rates because lenders have tightened theirstandards across the board, says Gerri Detweiler, credit adviser forCredit.com.
If you'vealready found a home you'd like to buy, there's not much you can do to raiseyour score before you apply for a loan. But if you're just starting to touropen houses, there are steps you can take to improve your credit profile,including:
„Review yourcredit reports for errors. Go to AnnualCreditReport.com and order your creditreports from the three main credit-reporting bureaus: Experian, TransUnion andEquifax. You're entitled to a free credit report once a year from all three ofthe bureaus, but only if you go through this website.
Once you receiveyour credit reports, go through them and look for inaccurate information, suchas accounts you never opened. All of the credit bureaus provide a process todispute errors, says Craig Watts, spokesman for Fair Isaac, which created thewidely used FICO score.
„Pay off creditcards and other debts. One of the factors used to calculate your credit scoreis your "credit utilization ratio," which measures the amount ofcredit you have outstanding vs. your total available credit. This ratioaccounts for 30% of your score. Paying off balances will increase the amount ofunused credit you have available, which will help your score.
But even ifyou'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 availablecredit, which could hurt your credit utilization ratio.
„Avoid openingany new accounts. "Every new account you open is likely to drop yourcredit score, at least a little," Watts says.
Checking yourscore
When you orderyour free credit reports from AnnualCreditReport.com, your credit scores aren'tincluded; you'll have to pay a fee to get them.
In recentmonths, though, several services, such as Quizzle, Credit Karma and Credit.comhave launched programs that provide free credit profiles. These websites canprovide a useful snapshot of your credit standing and provide tips on how toimprove it, Detweiler says.
If you'replanning to buy a home a year from now, she adds, it doesn't make sense tospend a lot of money to buy scores that could change by the time you apply fora loan.
But househunters who plan to apply for a loan in the next few weeks should know theiractual FICO scores, because that's the score most potential lenders use,Detweiler says.
You can buy yourFICO score and credit report from TransUnion and Equifax at www.myfico.com for$15.95 each.
Earlier thisyear, Experian stopped selling to consumers the FICO scores it provideslenders, Watts says. You can buy a credit score based on Experian's own scoringmodel for $15 at www.experian.com. Experian's website also promotes a"free credit report and score," but to get this deal, you must enrollin a credit-monitoring service that costs $14.95 a month.
Typical factorsthat influence your FICO credit score:
Payment History –
Amounts Owed –
Types of credit used -
New credit -
Length of credit history – 15%