How to Fix a Bad FICO Credit Score for a Home Loan

A borrower's credit score is an important number.

When purchasing a new mortgage or home loan, borrowers must meet certain credit score requirements. For a government mortgage, such as a FHA, USDA or VA, the minimum credit score is 580. For a conventional mortgage, the minimum allowable credit score is 620. To fix a bad FICO credit score for a home loan, take a few simple steps and keep record of your work to ensure the score rises over time.

Instructions

1. Get a copy of your credit report to determine what work must be done to raise your FICO credit score. By federal mandate, each person can get one free credit report per year from AnnualCreditReport.com. Provide the site with your full legal name, date of birth, Social Security number and credit card information.

2. Comb through your credit report for errors. Report any immediately to the credit bureau through the website. Keep a record of all communication with the credit bureau. Note that the credit bureau has 30 business days to respond to requests via email.

3. Highlight any negative items. These include late payments, liens, judgments, collections and bankruptcies. First and foremost, get any late payments current. You cannot close on a mortgage loan with outstanding late payments on any lines of credit. Contact the lenders to determine a payment plan, if needed. Next, tackle the liens and judgments. These will have to be paid in full prior to incurring a new mortgage debt. Note any collections. Full payment on these debts will help increase your credit score; however, it is not required to close a mortgage. If there are any bankruptcies, they must be discharged a full two years before applying for a traditional mortgage.

4. Pay down any credit cards or lines of credit to less than 30 percent of their credit limit. This lowers your credit utilization and quickly raises your score.

Tips & Warnings

• The best thing you can do to maintain your credit score is to pay bills timely and limit your debt utilization. This will not only maintain your credit score, but also limit your interest expense and avoid late payment fees.

• Keep a record of all payments on negative items as proof, if needed, to verify payment with the credit bureau. This is especially important for collections, which are notorious for lingering on credit reports.

References

• Federal Reserve Bank of San Francisco: How to Establish, Use and Protect Your Credit
• Federal Reserve: 5 Tips for Improving Your Credit