The role of your credit scores

Recent media reports suggest that between 25 and 30 percent of Americans cannot qualify for a mortgage due to having FICO credit scores of less than 620, while credit scores of 720 and above are necessary for receiving the best deal on your new home loan.

Low home prices plus rock bottom mortgage rates plus tighter credit: Formula for frustration

Unless you have good to excellent credit, you may find it difficult to get a mortgage at current low rates. Mortgage lenders have "upped the ante" on risk management, and are no longer lending to anyone who walks in the door. In short, you have to sell your credit profile in order to buy a home. Here are some tips for raising your credit scores. There is no "instant fix" for bad credit; please don't fall for scams promising to "erase" bad credit or "fix your credit overnight."

• Know your credit scores: You can order free credit reports annually; credit scores are available for purchase. Reviewing your credit reports and knowing your scores is essential for resolving erroneous information and knowing what you need to do to get optimum mortgage rates and terms.
• Pay down "bad" debt: Mortgage lenders evaluate the ratio of how much you owe to your gross income (debt-to-income or DTI) and your assets minus your debt (net worth); the lower your debt, the better your loan application looks to lenders. Using a mortgage prequalification calculator can help with identifying how much debt you'll need to pay off. Mortgage lenders typically prefer to see a debt-to-income ratio of about 33 percent.
• Establish affordability: Learning in advance how much you can afford helps you focus on homes in your price range taking out a mortgage than you can handle. Using a mortgage comparison calculator helps you determine how a lower mortgage rate provides additional buying power.

Planning and preparing can save time and help you find the best available mortgage rates and terms for your situation.