Mortgage loans now require higher FICO score

You may think that having a credit score of at least 700 and a down payment of almost 5 percent will help you buy a home in this home buying environment. But lenders have tightened credit requirements for obtaining a mortgage when you're buying a home.

You may still be able to get an affordable mortgage through the FHA, which has lower down payment requirements, or that you're better off waiting until you have improved your credit score and saved more money for a down payment.

For the most part, your best loan option might be an FHA loan because of the size of down payment you want to put into the purchase. As for most other loan products, you may find it difficult to secure a low down payment loan.

FHA loans require just 3.5 percent in cash for a down payment. On a $160,000 home purchase, you'd have to put down at least $5,600, but you'd have to be able to afford the payments. On a 30-year fixed rate mortgage at 5 percent, your monthly payments would be about $840 plus real estate taxes and insurance.

While 700 is a good FICO score, it's not a great credit score. Some lenders are now looking for borrowers to have at least a 72o FICO score to get the best rates.

If you decide to pursue buying property now, speak with a mortgage lender to see what options you may have. You may be pleasantly surprised to find that you and your fiancé will qualify for a nice starter home. If not, at least you'll know what you have to do to get ready to buy down the road.

Sample Credit Report Dispute Letter

Date
Your Name
Your Address
Your City, State, Zip Code

Complaint Department
Name of Company
Address
City, State, Zip Code

Dear Sir or Madam:

I am writing to dispute the following information in my file. The items I dispute also are encircled on the attached copy of the report I received.

This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information.

Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please investigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.

Sincerely,
Your name
Enclosures: (List what you are enclosing)

Help for people with no FICO Score

You might think that your FICO score is the be all and end all of your credit report. You would be wrong.

There’s a “parallel credit universe” out there, and it’s important to know how it works so that you can continue to work for the best credit possible, and thus the lowest rates on everything form your car loan to your home loan.

There are still only three major credit reporting agencies (TransUnion, Experian and Equifax), and most lenders either buy credit reports from them or send your account information to them. FICO, built by Fair Isaac, is a credit score that resides on the mainframes of all three agencies. But many people – an estimated 50 million in the U.S. – do not have any credit with lenders who report to the “Big 3” credit agencies, which makes it extremely difficult for them to get loans at competitive rates.

Outside of getting a credit card and taking on some debt, there’s another option for these folks. A company by the name of PRBC (Payment Reporting Builds Credit) allows consumers to self-report the details of their rent, utilities, cell phone bill and other nontraditional financial obligations. The company verifies your report, for a fee, and then grants you a new credit report. FICO has even built a credit score that will score their limited data and provide a risk score that lenders can use to evaluate nontraditional information for a fee of about $30. The advantage to this approach is that it gets you into the system of the credit agencies, albeit for a cost – and it’s still not widely used by mainstream lenders, said Ulzheimer.

There’s also a new credit score in town trying to give FICO a run for its money. VantageScore is a proprietary score created by all three reporting agencies that competes with Fair Isaac. You can learn more about Vantage here.

Bad Credit? Don't Despair

Just because you have a poor credit report doesn’t mean you won’t be able to get credit. Creditors set their own credit-granting standards and not all of them look at your credit history the same way. Some may look only at more recent years to evaluate you for credit, and they may grant credit if your bill-paying history has improved. It may be worthwhile to contact creditors informally to discuss their credit standards.

If you’re not disciplined enough to create a workable budget and stick to it, work out a repayment plan with your creditors, or keep track of mounting bills, consider contacting a credit counseling organization. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But not all are reputable. For example, just because an organization says it’s “nonprofit,” there’s no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, or hide their fees by pressuring consumers to make “voluntary” contributions that only cause more debt.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

If you are considering filing for bankruptcy, you should know about one major change to the bankruptcy laws: As of October 17, 2005, you must get credit counseling from a government-approved organization within six months before you file for bankruptcy relief. You can find a state-by-state list of government-approved organizations at www.usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

For more information, see Knee Deep in Debt and Fiscal Fitness: Choosing a Credit Counselor at ftc.gov/bcp/conline/edcams/credit/