Getting a mortgage with a low credit score

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I recently had a very good question submitted to us from one of our visitors, she wrote:

“When I first decided to buy a house it seem like only a dream, my scores where in the low 500, the mortgage company told me about all the things on my credit that I need to pay off, and also all the things I need to keep in good status. I then paid off all the things on my credit and kept my car loan up for the last past year….now my credit is at a 615 what is that I must do to make my credit score rise more, they want it to be at least a 620 to get the loan… please help me!!!!”

Sounds to me like you have had some trouble in the past with late payments, and probably high credit card balances. If you’re able to get your credit score up to 620, that’s a huge improvement over the low 500’s, and I think congratulations is in order. A credit score in the lower 600 range will not get you the best interest rates, but you are well on your way to improving your credit score.

First thing’s first

Here’s a good idea of how your credit score is determined:

  1. Payment history: 35% of your score
  2. How much you owe: 30 % of your score
  3. Length of credit history: 15% of your score
  4. Newly opened accounts: 10% of your score
  5. Types of credit accounts: 10% of your score

Payment history

As you can see above, #1 factor is your payment history. Have you made your payments on time in recent years? How late have you been, if at all? Being 60 days late hits your credit score harder than a 30 day late payment does. Maybe you’ve had some trouble in the past with this, you can’t change history, but you can help shape your future. Just make sure you pay your bills on time, this is key.

How much you owe

The importance of this is right up there with payment history. Pay special attention to your credit card balances. It’s best to keep your credit utilization ratio below 25%. This means if you have a total credit line of $10,000 (total of all the limits on your credit cards), you should keep a total balance no more than $2500 on those cards. The closer you move to having a 50% debt to limit ratio, the lower your score will go. And once you go over 50%, your credit score takes a big hit. So pay special attention to this part and work very hard on keeping your balances low.

Length of credit history

This one you don’t have much control over. One thing to keep in mind is keep your oldest accounts open, such as credit cards. If you have too many open accounts, and you must close some, cancel your newest accounts and keep the oldest ones active. You want your credit history to look as old as possible, closing old accounts will make your credit history look shorter.

Newly opened credit accounts

Opening many credit accounts in a short amount of time is not good for your credit score, even if you don’t carry high balances on these accounts, and pay your bills on time. Every new account you open will ding your score, so open new accounts only when you really need to. Time to say no to the store clerks who want you to open a credit account at their store and save 10% on your purchase. It may save you money now, but if you’re trying to maintain or build a good credit score, it’s a good idea to just use the credit card you already have, or pay with your debit card instead.

Types of credit accounts

Lenders and creditors like to see how you handle your credit accounts of all types. Auto loans, mortgages, credit cards, student loans are some good examples. If you only have credit cards on your credit report, and no installment loans like student loans or auto loans, you may appear to be at higher risk because the lender can’t look at your credit report and see how you handle installment loans. If this is the case for you, you may end up paying higher interest on your first loan, or they may ask that you have a co-signer on your loan.

Again, don’t open new loan accounts just for the sake of improving your credit score. Only open new installment loans as needed, and be sure to pay your bills on time.

On the road to a higher credit score

If you’re trying to further improve your credit score, be sure to pay your bills on time every month, keep low balances on your credit cards, don’t open any new accounts unless you absolutely have to (this includes department store credit cards). If you already have some dings on your credit report, time will heal these, just hang in there and your score will improve.

Credit score estimator

If you are having trouble figuring out what things to focus on first when trying to improve your credit score, check out our credit score estimator. You can plug in different scenarios and see which events affect your score the most. It’s a great financial tool, check it out.

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