To qualify for an FHA loan, you need to have a credit score (commonly known as a FICO score) above 580. If your FICO score is below 580, you're below the Mendoza line.

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Baseball fans will know what I mean by this -- to be considered deserving of a spot in the major leagues, it's widely believed that a player needs a batting average exceeding 200. It's named after shortstop Mario Mendoza, who was considered as incompetent a hitter as should ever be allowed to play major league baseball.

Mortgage lending's version of the Mendoza line is 580. Beneath this score, you cannot obtain mortgage financing from mainstream lenders at decent terms.

So, how do you go about quickly bringing your FICO score above this magical level? Taking steps like closing credit accounts sounds should seemingly help -- but it doesn't. To understand why, dig a little deeper into the world of how credit scores are calculated.

Credit account age and credit scores

It's a myth that closing accounts improves your credit score. If you have an account with derogatory history (bad credit) on it, closing it out does not make that history go away. Only time can do that. What closing accounts will do is shorten your average credit account history length, which is a factor that FICO considers in calculating your score. Moreover, closing accounts also drops the amount of available credit you have, which increases the amount of your debt relative to the credit available to you (known as the credit utilization ratio). A utilization ratio that is deemed too high will lower your FICO score.

If closing accounts makes your score worse, will opening accounts increase it? The answer is no, not in the short term: Opening up a bunch of new accounts does not increase your score either. FICO researchers have found that borrowers with new debt are more likely to miss loan repayments than borrowers who have not opened new accounts. So FICO's scoring model treats new accounts as a negative. In 6 to 12 months, the "newness" wears off, and then the effect of additional available credit may be positive.

Here's the really counterintuitive tip: Paying off really old collections does not help and can actually hurt. That's because the amount of damage a derogatory item does to your score lessens as years go by. When you pay an old collection account, you actually make it a recent event with your new activity and reset the clock on it. What can you do, in this case? Negotiate with the collection agency and get an agreement in writing that the collection will be completely removed from your credit history.

Steps that do increase your credit score

Now that you know what land mines to avoid, what can you do to improve your credit score? Here are some tips:

  • Improve your utilization ratio by paying down balances. This is a proven way to improve your scores. It gives the appearance of an improving financial condition, even if you really borrowed the money from your Mom to pay your AmEx. Similarly, Mom -- or another trusted person -- can add you as an authorized user to one of her good accounts, which gives you the benefit of more credit without the liability.
  • Set up automatic billpay with your bank. This won't directly improve your score, but paying your bills on time every month builds good credit history. Because the most recent history is the most highly weighted, you'll see the effects very quickly of keeping your nose clean.

Remember, you don't have to be perfect to qualify for an FHA loan. Getting a 580 or better credit score isn't that hard, but there are few quick fixes. Put your strategy into place, then check your FICO every six months until it's high enough to get your approved for an FHA loan.