dave-mittlemanWith mortgage rates at an all time low, it might seem like a good idea to take advantage of the depressed housing market and purchase your first home.  However, it’s still a lot harder to qualify for a mortgage than it used to be, meaning that both the local and national housing markets may not benefit from the lower rates.  

According to Freddie Mac, the interest rate on a 30-year mortgage currently hovers around 4.57%–the lowest rate since the company began tracking rates in 1971.  The last time rates were lower was in the 1950s when most long-term loans lasted 25 to 30 years.  Locally, rates for some 10-year mortgages are as low as 4%, but to qualify for such a great deal you must have sparkling credit, something many Michiganders don’t have right now.  Specifically, lenders base mortgage rate offers on the FICO score, which can range from 300 to 850.  According to Joel Dakers, senior mortgage advisor at Ideal Mortgage Services in Haslett, any FICO score lower than 620 pretty much disqualifies a potential homebuyer from obtaining any financing options.  Ideally, a FICO score of 700 or above will get even better mortgage rate offers.  Today’s housing market lending stands in stark contrast to just a few years ago, during the housing market bubble, when some subprime lenders were willing to make deals with people with very shaky credit.

Nevertheless, if purchasing a home is one of your goals and you have bad credit, there are still some steps you can take to improve your FICO score:

  • Pay your bills on time: having a long history of making payments on time on all types of credit accounts is one of the most crucial items that lenders look at in making their decision to loan you money to purchase a home.
  • Pay down your credit cards so that you owe less than 50% of a card’s maximum: when comparing the amount you owe to the amount of credit still available, your credit score could be lower if you owe more than 50% of the total credit available for each account.  That’s because when you are close to maxing out a card, lenders see you as a higher risk and more likely to make late payments in the future.
  • Keep your cards open: in general, credit accounts that have been open for ten years or longer will help your credit score.  The FICO score considers your oldest active account and the average age of all accounts.
  • Don’t open a lot of new credit cards all at once:  opening several new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries may be seen as risky credit behavior on the near horizon, and can therefore lower your credit score.

About 13% of the population has a credit score of 800 or higher.   If you look at their credit profile they have the following characteristics in common:

  • four to six credit card accounts,
  •  no late payments in the past seven years,
  • at least one installment loan — a mortgage or a car loan — with excellent payment history,
  • an average of 10 years credit history per account and a few accounts with 20 years of good history,
  • a low number of credit inquiries (fewer than three in the past six months),
  • no bankruptcies, foreclosures, charge-offs or collections, and
  • debt levels at no more than 35 percent of their overall credit limits per account.

While you might not be able to buy a home tomorrow, you can start taking these simple steps today to ensure a better credit score in the near future.  Remember, having a long history of making all payments on time, using the right mix of credit, and not maxing out on available credit are the keys to a having a great credit score.