What is the first step to buying my first home?  In the past,  I would have advised that the first step is to get prequalified.   However, with today's lending environment,  the first step is to review and manage your credit.  Click here  to request free copies of your annual credit reports.   Pay the small fee to get all three credit scores (Equifax, Experian and Transunion).  If your middle score is 620 or better, then contact a Loan Officer(LO) to begin your preapproval process or a Realtor who will be able to refer you to a trusted LO.   

If your middle score is below 620, you should work on your credit before you contact a LO.   Additionally, sign up with a credit monitoring service, where you can view, monitor and practice what if scenarios for ways to increase  your scores.  It's important to keep track with all three scores.    While there are lenders that say they can loan with credit scores as low as 580, the reality is, those  loans typically require above market interest rates, higher down payment, and additional conditions that most borrowers won't be able to meet.

 Here are some tips to improve your credit:

1.     Pay all of your bills on time moving forward and work on keeping your proportion of balance to credit limit low.  For example if you have a credit card with $1,000 limit, keep balance below $500 or lower at all times.  The lower the better.

2.     Dispute all derogatory information that are old, outdated or incorrect (If the credit bureaus can't verify the information within 30 days, per the Fair Credit Reporting Act, they have to remove it).  If you do not have time to dispute the accounts, consult with a reputable credit company to assist you.

3.     Open a Certificate of Deposit (CD) at a small bank or credit union and ask to take out a personal loan, secured by the CD.   Banks loans have a strong impact on your scores.  Pay the loan off as soon as possible (within 30-90 days).  If you have enough funds, you can repeat the process at a couple of different banks.  You will have positive paid account as part of your trade lines and your scores will increase.   

Finally,  keep a close watch on FHA's Collection Policy.   FHA had issued guidelines effective April 1, 2012, requiring that all collection accounts total no more than $1000 in order for the loan to be FHA insured.  Those rules have been delayed until July 1, 2012. If FHA decides to reinstate that policy, it will definitely impact not only a borrower's ability to qualify for a loan, but also when and how they pay off collection accounts.