In today’s world, credit is all-important. With good credit you can buy the house of your dreams. The problem, of course, is what to do when your credit is not quite what it should be. Today, being credit-challenged does not usually mean you can’t get financing. However, the worse your credit, the higher the interest rate, the more cash you must come up with and the lower the LTV (loan-to-value-ratio of the loan to the value of the property). All of which is to say that your ability to afford the home of your dreams, with credit problems, is greatly diminished. However, there are legitimate ways to improve your credit. Here are 5 techniques that will help both in the long term and in the short run.
1. Verify Your Credit
There are three national credit bureaus: Experion, Transunion, and Equifax. They contain input from many other smaller credit reporting agencies around the country. If you’ve paid your bills on time, that will show up on this report. And if you haven’t paid bills on time and have other problems, that will show up as well. Mortgage lenders regularly order a “three-bureau” report, which sends them your credit from all three. Which is to say, you can’t hide bad credit. Therefore, before you apply for a mortgage, probably before you begin house hunting, order a credit report on yourself. If you find that there are errors, correct them.
2. Pay Off Excess Debt
In calculating how a big a monthly payment/mortgage to give you, lenders take into account your available income. However, the more debt you currently have, the less income is available to pay the new mortgage. Therefore, when possible, pay off as much of your short term (such as from credit cards) debt as possible. That way you increase your income (less is set aside to pay for the short-term debt) and you may have a better chance of qualifying. There is a downside to this, however. The more debt you pay off, the less cash you’ll have available for a down payment and closing costs. It’s a balancing act.
3. Hang onto Old Credit Card Accounts
Lenders want to know that you’ve been successfully borrowing for a long time. That tells them that you’re a good money manager. To determine this they look at your oldest trade lines (credit cards). The older the better. Hang onto your old credit cards. Keep a credit card that you’ve had for years, even if a new credit company offers you a somewhat better deal. That old credit card shows that you have a long history and may help you get your mortgage.
4. Don’t Have Too Much Credit
Generally speaking, if you apply for credit more than three times within a six-month period, it’s likely to be a mark against you. (Yes, it’s irrational!) A good balance between credit cards, car loans, personal finance companies, and other installment loans is best. You don’t want a lot of any of these or even a huge total. But the fact that you’ve got a car loan, three credit cards (a good number), perhaps a department store card, and you’ve maintained reasonable balances all suggests you’re a good credit manager. That’s what the lenders actually want the most.
5. Get Bad Credit Fixed
It’s a myth that you can have all bad credit “fixed.” Companies that offer to fix or make any credit problem simply disappear, particularly if they charge you a hefty fee for doing so, may be nothing more than scams. On the other hand, some types of bad credit can be remedied, either by doing it yourself, or by hiring a company to do it for you. If the issue can be fixed, make sure to take care of it before applying for financing.
The importance of a good credit rating really can’t be overstated during the mortgage
lending process. While lenders can be flexible with their loan programs, most still hold the credit rating as one of the key deciding factors in both lending money and determining interest rates. Credit ratings show your overall financial health. The best advice for improving your credit is to be proactive. The best case scenario is that you maintain a good credit rating and don’t have to worry about “fixing” or improving your credit.