If you're fixing your credit problems, paying off debt and saving money to become a homeowner, you should understand which actions increase your credit scores, and which ones hurts them.

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Bad credit mortgage lenders demand higher interest rates and fees to compensate for the greater risks of subprime lending. Even Fannie Mae and Freddie Mac apply "risk-based pricing" to all applicants, charging folks with lower credit scores and less equity more than those with high scores and big down payments.

FICO scores and mortgage rates

Conventional (non-government) lenders reserve the best mortgage rates for applicants who can boast FICO scores of at least 740. On a $300,000 mortgage at 80% loan-to-value, these folks may pay $7,500 less than applicants with 679 FICO scores -- for exactly the same loan.

Transforming bad credit into good credit

Better scores mean easier loan approval, lower fees and the best mortgage rates. If you have better things to do with $7,500 than pay loan fees, take steps to improve your credit score:

  1. Check your credit report for errors and correct them.
  2. Bring any past-due accounts up-to-date.
  3. Pay bills on time.
  4. Reduce your balances to less than half of your credit limit.

Improving your credit score takes time; some types of negative information can stay on your report for seven to ten years. However, the most recent history is weighted much more heavily than old data, and replacing bad old history with good new data improves your score faster than you might expect. You'll only know if you qualify for a mortgage if you check with a mortgage lender. Complete the form on this page to get offers from licensed lenders in your area.