Check, correct credit score before search begins

LOS ANGELES — Decide to become a homeowner and, inevitably, you'll have to confront your credit score.

You can try to improve your odds of qualifying for a home loan by saving more for a bigger down payment, but your credit score is the most important factor in determining what interest rate you'll pay — or whether you qualify for a mortgage at all.

Your credit score, commonly known as the FICO score, is derived from your history of taking on debt and paying it off. Make the wrong financial move in the weeks or even months before you sit down with lenders to buy that dream home and you could end up paying a lot more for your loan.

"With the way the economy has been, it takes a higher FICO score now to get the best (interest) rate than it did a couple of years ago," says Barry Paperno, manager of consumer operations for Fair Isaac Corp., the company behind the FICO score.

FICO scores range between 300 and 850, with the highest reflecting the best credit risk. The median FICO score nationally is around 720-723, according to Fair Isaac.

Unless you are a first-time buyer or have a large down payment, lenders will want to see a FICO score of 680 or higher, says Robert Satnick, chairman of the California Mortgage Bankers Association and CEO of Prime Financial Services in Van Nuys, Calif.

"The higher their credit score, the more flexible the lender is going to be, because it's just a believable benchmark of their ability to manage their finances and their credit," he says.

How your FICO score is generated depends on your credit history, which is collected by three major credit reporting agencies: Equifax Inc., Experian Group and TransUnion LLC.

The first step in gauging your FICO-worthiness is to pull your credit report from each of the credit bureaus.

The reports show how much you owe, what kind of debt and your bill-paying habits. They also show any serious credit problems, such as a bankruptcy.

The next step is getting your FICO score.

This can be confusing because the major credit reporting agencies each sell their own versions of an overall credit score, so-called educational scores, which can vary from the real FICO score.

The companies' calculations for your score can also vary depending on the type of loan you're applying for, because they tailor credit scoring formulas to different types of lending, such as auto loans or credit cards.

To get the FICO score mortgage lenders will be using when they evaluate whether to underwrite your loan, go to myfico.com, a unit of Fair Isaac. Obtaining a FICO score and credit report from one of the credit bureaus costs $15.95; the combination of all three scores and reports costs $47.85.

Customers can get a free credit report from each of the three credit reporting agencies once a year — www.annualcreditreport.com — but FICO scores are not included.

The credit factors that determine the score are: a person's payment history (35 percent of the score), how much they owe (30 percent), the mix of credit and installment loans they have (10 percent), the length of their credit history (15 percent), and whether they have applied for new credit recently (10 percent).

Still, the weight these variables have on a credit score can vary somewhat depending on the makeup of each person's credit file.

Improving credit

Credit experts say the single best way to improve one's credit score is to make payments on time and keep credit balances at 30 percent or below your total available credit.

People with department store credit cards, in particular, can be susceptible to taking negative hits on their credit score because those cards typically don't have a grace period for repayment and the companies will quickly report consumers to the credit bureaus as being late even after only one day.

Being reported as currently past due can whack off 100 points from a credit score, warns Virginia "Ginny" Ferguson, who chairs the National Association of Mortgage Brokers' credit scoring committee.

And, she says, "They need to make sure that they're not opening new accounts, because that can drop their scores slightly."

Maxed out credit cards are another red flag and can significantly hurt one's FICO score.

So, if possible, aspiring homebuyers should pay down or pay off their credit cards, and avoid big credit purchases.

"Don't go out and start buying a bunch of furniture in anticipation," Satnick says. "Save as much as possible."

Sometimes a credit score is lower than it should be because errors have crept into the credit reporting agencies' records.

Obviously, it's crucial to get any errors fixed before applying for a home loan, but this can take weeks or months, especially if the mistake shows up on more than one credit bureau report.

"Unfortunately, if that account you paid off two years ago is still showing not paid at all three bureaus, you're going to need to dispute that at all three bureaus separately," says Paperno.

The Federal Trade Commission has warned consumers against firms offering services claiming to improve a person's credit report for a fee.

"They can't do anything for you that you couldn't do yourself," Paperno said.

Credit bureaus are required to check disputed information on a consumer's credit report within a few weeks, or remove it. A typical tactic of credit repair firms is to spam credit bureaus with such requests in hopes the negative items end up being dropped.

But Paperno says often those items will show up again the next time the credit card company or other creditor issues an update to the credit bureaus.

The credit bureau reports typically include reasons why a credit score isn't as high as it could be, such as too many collection items or delinquencies in the past seven years, or too much credit being used.

Some of these issues can be addressed quickly, like paying down balances, but there's no quick fix for derogatory items still on file. Only time can wipe those away.

Negative credit information can typically stay on one's credit report for seven years, although some bankruptcies can stay on 10 years.

Generally, the more recent a credit blemish, the worse it's going to drag down the credit score.

Experts also warn against closing accounts suddenly in an attempt to improve one's score.

That merely narrows one's available credit and, depending on how much debt one has, hurt their score, Ferguson says.