- Personal Finance
Affordable Credit Repair Options for First-Time Homebuyers
If you’re a prospective first-time homebuyer and you don’t have the best credit, here we’ll discuss two affordable credit repair options that can help you qualify for a home loan.
Affordable Credit Repair Option #1: Credit Rescoring
Rapid rescoring, in essence, allows you to take immediate action to increase your credit score; you can improve your credit score fast. Following is how.
Improve Credit Score Fast!
For example, let’s say you owe $5,000 on a credit card and it’s negatively impacting your credit score because your debt to income ratio is too high. Your mortgage consultant tells you that if you pay off the card, you can then have a rapid rescorer get your credit score recalculated within 72 hours, instead of waiting for the payment to show up 30 days later when the credit bureaus update their credit files.
Once you do this, three days later your credit score has increased from a 690 to 730 and you are able to qualify for a home loan at 5.45%, saving you over $60,000 in interest payments over the next 30 years.
This is the value of credit rescoring.
How Much Does Credit Rescoring Cost
It's not expensive at all when you consider what it could cost you in interest over the long haul, as illustrated just above. Most credit rescoring companies charge anywhere from $25 to $50 for each item on your credit report that they fix.
Who Should Use this Affordable Credit Repair Option
First-time homebuyers with credit scores below the average needed to qualify for a home loan. Right now, this is in the 720-780 range. Also, credit rescoring is ideal for those who don’t have time to go the do it yourself route, eg, you’re planning to apply for a mortgage loan in the next month or two.
Affordable Credit Repair: What Rapid Rescoring Can’t Do for You
Rapid rescoring can’t remove negative items like late payments from your credit report. It also can’t improve your credit score if your problem is too much debt that you can't afford to pay off immediately. Rapid rescoring can only improve your FICO score if the creditor admits that it was a mistake made by them and they agree to remove that information.
Affordable Credit Repair Option #2: Do It Yourself Credit Repair
If you start a six months to a year out, you have time to repair your credit yourself. All it takes is knowing who to contact, and how. Following is the basic process if you decide to go the “do it yourself” credit repair route.
(i). Order a copy of your credit report from the three major credit reporting agencies. Following are their names and contact info:
P.O. Box 2002
Allen, TX 75013
P.O. Box 1000
Chester, PA 19022
P.O. Box 740241
Atlanta, GA 30374-0241
Remember, free credit reports do not include FICO scores. You have to pay for those, and you can order your reports, which will include credit scores from reputable sites like myfico.com and SuzeOrman.com.
(ii) Read Reports: Once you have all three copies in hand, go through them with a fine-tooth comb. What you’re looking for are inaccuracies that you can legitimately dispute.
(iii) Contact the credit reporting agencies about the inaccuracies: Consumer protection laws require that you notify credit bureaus in writing. Credit repair experts advise sending a certified letter, along with any documentation you have to prove the inaccuracy(ies).
(iv) Follow up: You can call to make sure that your letter was received and ask other pertinent questions (eg, when can I expect this to be corrected (should be 30 days or less)).
Get complete details on this affordable credit repair option.
Now that you know there are credit repair options available to you whether you’re looking to buying a home now or one year from now, let’s look at two things you should do before you even start looking at homes. Following this advice will make the home buying process so much easier.
First-Time Homebuyer Tip #1: Check Your Credit Reports
When I was a mortgage consultant and conducted seminars for first-time home buyers, one of the things I always recommended was that consumers check their credit reports at least once a year. Why?
Because there can be some surprises on there. You’d be amazed at how inaccurate most credit reports are. According to the Bankrate.com article, 7 Steps to Fixing Your Credit Report:
The big three credit bureaus -- Equifax, Experian and TransUnion -- process huge amounts of information. A 2004 study found that 25 percent of the credit reports surveyed had errors that were serious enough to cause consumers to be denied credit.(emphasis added)
Hence, it’s critical that you know what’s on your credit report before you even think about buying a home because, as the info above states, some errors on your credit report can be serious enough to cause you to be denied for a home loan.
So, when you realize that you are serious about but purchasing a home, the first thing you should do is order a copy of your credit report from all three credit reporting agencies, ie, Equifax, Experian and TransUnion. Learn how to order free credit reports.
First-Time Homebuyer Tip #2: Live On Your “Mortgage Paying Budget” for at Least Six Months
What do I mean by this? Most first-time homebuyers underestimate what buying a home means. For example, when you rent and something goes wrong, you call the super or the building’s management company and they handle it for you.
When you own the home though, those costs come directly out of your pocket. And, it’s not just “if” something happens, it’s a matter of when --- it always does. Then, there’s the ongoing costs of homeownership, eg, property taxes, lawn maintenance, remodeling costs (there’s always something you’ll want to improve on); decorating (new comforter set for the guest bedroom, new shower set for the master bath, etc.).
All of this adds up.
So, to get a very realistic idea of what it actually means to have a mortgage, cut your current living expenses by 25-35% -- for six months. This may mean eating out less, shopping less, cutting leisure activities you enjoy, etc. If you find that it’s difficult to do this or that you just don’t enjoy it, then you might not be ready for homeownership.
Whether you’re ready to buy a home now or want to hold off, knowing about the affordable credit repair options discussed here will help you on your journey to home ownership.