House hunting can be one of the most exciting times in your life.  If only it didn’t have to be one of the most stressful too.  The culmination of hard work and saving money to finally purchase your own home is almost always coupled with the uncertainty of securing a home loan.

You may have found the perfect place and you’re all set to close the deal, but then you sit on pins and needles while a lender holds your fate in their hands.  This shouldn’t be the first time that you consider what past financial mistakes might be working against you.

Your decision to take a look at your credit scores should come before you begin the house hunting process.  More than ever lenders are adhering to strict credit score guidelines when it comes to your approval.  If you’ve allowed bad credit or debt to linger, you may find yourself rushing to find a lender that’ll approve you in the 11th hour.

Look At Your Credit Reports

If you don’t want to lose sleep over mortgage approval, your best bet is to know your score before you apply.  The credit bureaus offer a free credit report each year, take them up on it.  Ultimately credit repair is just making sure that your reports are 100% accurate.  Whether you choose to do it yourself or go with a professional is a matter of personal preference.

Before you start tinkering with credit repair though, you need to understand that fixing your credit won’t result in a perfect credit score, but it may boost it enough so that you’re confident in your loans approval.  An added benefit is that higher scores could mean lower interest rates.

Outstanding Debt

Unpaid debts tell potential lenders that you haven’t been responsible with the money you’ve borrowed.  See if the collectors will accept a debt settlement offer.  Often times collectors will even agree to stop reporting the debt to the credit bureaus if you pay them in a timely manner.

Plan Ahead

Once you get the impulse to start looking for a house, make sure you get all of your finances in order.  This includes your credit profile.  Your credit score isn’t the only factor that plays a part into the lender’s approval process, but it does carry a lot of weight.

If you’re making sure that your credit reports are accurate and up-to-date about 6 months to a year in advance, you’ll have a better chance of walking away from the home loan process with a smile.

Only you’ll know for sure whether you need credit repair or debt relief, but one thing’s definite; if you never bother to check and simply hope for the best, you could end up completely discouraged by the whole idea of looking for a new home.

Until now.

Fair Issac Corporation (FICO) has just released some of the top financial missteps that people make regarding their credit and exactly how much each one can impact their credit score. FICO did this to help educate people about their overall credit profile and give them an idea of what kinds of things can negatively impact their credit score.

A few highlights of the common mistakes people make and how many “damage points” they can expect:

If your credit score is currently 780:

• Maxed out credit card – 25-40 points
• 30 Day Late Payment – 90-110 points
• Debt Settlement – 105-125 points
• Foreclosure – 140-160 points
• Bankruptcy – 220-240 points

If your credit score is currently 680:

• Maxed out credit card – 10-30 points
• 30 Day Late Payment – 60-80 points
• Debt Settlement – 45-65 points
• Foreclosure – 85-105 points
• Bankruptcy – 130-150 points

According to FICO spokesman Craig Watts:

“I hope this information will help people to better understand FICO scores and the value for them of avoiding credit missteps. It illustrates key points such as the higher your score, the farther it can fall if you stumble. Getting and maintaining a good score isn’t complicated. We all just need to pay our bills on time, keep credit card balances low and take on new debt sparingly. ”

With the revealing of at least part of their overall FICO formula of how your credit score is calculated, one thing that is now known is that those people who have excellent credit have more to lose with a mistake. For example, someone with an average credit score of 680 who pays a bill 30 days late will see a drop of 60 to 80 points. But for someone with an excellent credit score — 780 — that same delinquency can send a FICO score tumbling by 90 to 100 points.

It appears as if FICO is making steps toward making your credit score more transparent – so that you can not only have access to your credit score, but you can also now know what kind of damage you can do to it by making a mistake.

Now, a University of Arizona law professor has a controversial take on strategic defaults, going so far as to suggest that homeowners should default on their mortgages and not feel bad about it.

“Millions of U.S. homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages,” writes Brent T. White in his paper, Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis. “Homeowners should be walking away in droves. But they aren’t.”

White says many people continues to pay on their mortgage loans because they are concerned about the shame and embarrassment that comes with defaulting and going into foreclosure. He also says that a person’s credit will take a big hit after going through a foreclosure, but that shouldn’t keep him or her from strategically defaulting. 

“But assuming one had otherwise good credit, and continues to meet other credit obligations, one can have a good credit rating again – meaning above 660 – within two years after a foreclosure,” he writes.

He even advises people to make large purchases, such as a car, another home, or other items they need to set up a new residence. ”Most individuals should be able to plan in advance for a few years of limited credit.”

Of course mortgage lenders and many others disagree with White’s advice. ”Borrowers who walk away from their mortgage obligations face serious consequences,” Fannie Mae spokesman Brian Faith told the Washington Post.  “There’s a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.”

What do you think? Is White’s advice urging homeowners to strategically default irresponsible?

Three years ago, it really didn’t matter what your credit score was – you could find someone to loan you money regardless of  what your credit score was. But times have changed and banks have gotten tougher when it comes to credit scores.

Which is why many people are being referred to a “credit repair company” if they apply for a loan and have lousy credit. If you have bad credit and can’t qualify for a mortgage, what is credit repair anyway?

Credit repair is nothing more than the process of questioning the information found on your credit report with the intention of finding and correcting any mistakes or inaccurate information that you find. As a result of correcting these mistakes that you uncover, your credit score will increase.

The process of questioning items found on your credit report means that you will need to write letters to the credit bureaus about specific items found on your report. The process of writing these letters can typically take between 3-9 months depending on how many items that you are questioning and asking to be removed.

One of the more common questions about credit repair is “is it legal” and the answer is yes – it is completely legal as long as you are attempting to remove only the inaccurate information.

A few of the key things to fix when fixing your credit report:

• Any accounts that have been “charged off”
• Any late payments
• Any collection accounts
• Any other negative items that are not accurate
• Any credit limits that are not correct
• Any accounts that are listed as “paid charged off” if you paid on time and in full
• Any accounts that are listed as “paid derogatory” if you paid on time and in full
• Any accounts that are listed as “paid as agreed” if you paid on time and in full
• Any accounts that were a part of a bankruptcy and were discharged as part of the bankruptcy process. Any accounts that were discharged in bankruptcy should be listed as “discharged in bankruptcy”

If you are like most people, you will find that the actual process of “fixing your credit” will not bring you “perfect” credit, but you might be surprised to find how many people raise their score just by cleaning up the derogatory information that is on their report.

And in today’s mortgage lending world, even a bump of just a few points may mean the difference between qualifying for a mortgage and not qualifying for a mortgage – or in other words – it can make all the difference in the world.

What Is A Good Credit Score?

In mortgage terms, when a lender looks at your credit score it can generally fall into these categories:

1. 760 or higher is an excellent credit score
2. 720-760 is a good credit score
3. 660-720 is a fair credit score
4. 600-660 your credit score is going to need some work
5. 599 or below: your credit score is really going to need some work before you can qualify for a mortgage

Three Tips To Improve Your Credit Score

1. Keep your open lines of credit to a maximum of three
2. Use no more than 50% of your available credit
3. Pay more than your minimum payment on your credit cards

These tips are important when trying to improve your credit score. Credit score calculations like to see only a few open lines of credit (the more you have open, the more it could hurt your score) and like to see you not having “maxed out” your lines of credit and making aggressive payments, not just the minimum.

How Important Is Your Credit Score?

Your credit score is only one of the things a lender looks at when you apply for a mortgage. The other factors they look at include income, loan to value and assets. How important is your credit score when applying for a mortgage? Important – very important!

Justin McHood is a loan officer living in the Phoenix, Arizona area. You can find Justin on Facebook, Twitter, ActiveRain or LinkedIn and he is happy to answer any mortgage-related questions that you may have.