Raising your Credit Score for a Mortgage Loan
The American Dream
Just about everyone has dreamed the American dream of someday owning their very own home. The white picket fence, the pool in the back, the wrap around porch......no matter what your house looks like in your dreams, you better check your credit score and report first. Nothing can squash that dream quite as fast as having poor credit history. Or even NO credit history. Either one can ruin your plans faster than you can say DENIED.
The problem with no credit history is that....well, you have no history. Plain and simple. Who wants to take a chance and loan you thousands of dollars to buy a house, when the lender doesn't even have proof of how you repay a simple credit card? The bottom line is, you must establish a credit history first and foremost. And keep it flawless. This doesn't happen over night, especially if you are starting with no history whatsoever. However, it can be just as bad if you have a credit history that shows poor ability to repay your debts. But if you start now, you can be well on your way to reaching your goals. Everybody starts somewhere!
There are many different types of loans, depending on what you qualify for, and also depending on where you are buying, type of home, how you are buying, down payment, etc. In general, a score of 620 minimum is required for a conventional mortgage loan. If you are looking to get an FHA loan, you may qualify with a score that is a bit lower, sometimes as low as 580. An FHA loan is generally good if you don't have quite enough of a down payment to qualify for a traditional loan. You can squeeze by with around 3.5% down with an FHA loan, where as a traditional loan is normally more like 10% down. However, there is a downside to either loan depending on your personal preferences and financial situation, so make sure you understand the pros and cons of both before making a decision.
Don't expect to take these tips and go buy a home in 3 months. It's probably not going to happen, unless your score isn't that bad to begin with. Establishing a good credit history will take time, and it will be frustrating. But when you see that score going up, it will leave you with a feeling of achievement for all of your hard work.
*Don't allow poor credit history to discourage you. The best thing you can do is speak with a mortgage consultant first hand, and get advice according to your own personal financial situation. That way, you know exactly what needs to be done, and a time frame that you can aim for.*
Pay off any outstanding debts. You will not get a mortgage loan with any debt showing as unpaid or in collections. It is ALWAYS better to have a credit history that shows on time payments all the time. Once you have messed up, it's already done. The statute of limitations is different for each state, but generally ranges from 3 to 10 years depending where you are. That means that blotch in your credit report can legally stay there, until the statute of limitations expires.
Even if you pay off an account that is already in collections, they are not required to remove the account from your credit. But always remember, it is better to PAY IN FULL than to SETTLE for a smaller payment. When you settle, it can show on your personal credit report as being settled rather than paid in full, and that still doesn't look so hot to lenders. Also feel free to ask that they remove the debt from your report if you pay in full all at once. They are not required to do so (and many won't do it), but some will just to get you to pay the debt. It will look good that your report states "paid in full", but would look even better if it was wiped off completely as if it never happened.
*Don't go overboard with applying for credit. Every time you apply for a new credit card, etc, it dings your credit report. If a lender checks out your credit, and you have been suddenly applying for a lot of new credit, it can throw up red flags. Take it easy! Only apply for new credit opportunities that you have a good chance of qualifying for. Research what credit score is usually acceptable for each and every card that you apply for.*
Do you have enough credit to show your credit worthiness? This is a big deal to lenders. You might think because you have some credit cards open and in good standing, that you are doing everything you can. Credit cards are considered revolving credit. And while you should have some revolving credit, you also must understand that not all types of credit are created equal. You need something else to make your credit score shine. Either a car loan or small personal loan (either one should be current or recent) will show them how you handle other types of credit. And the payments must be paid on time, or it doesn't help you.
If you really messed up in the past, and are trying to rebuild your credit, be prepared. It is not an easy task, nor is it quick to fix it. Start by paying everything off. Everything! Now you have a clean slate where you owe nothing. You'll probably have to start with a secured credit card. This is a card where you typically have to do a down payment, and that amount is considered your available credit line. Most of them will require you pay the full amount in relation to your desired credit limit. $500 down would mean a $500 credit limit,etc. But I would suggest trying to get the Capital One secured card. The down payment you pay is judged by how high or low your current credit score is. So you may qualify for a small down payment of $49, to earn a credit limit of $200. That's not a lot, but it's a start. Eventually if you have a couple secured cards and keep up on paying them off, you will sooner or later qualify for an unsecured card, which is a good step in the right direction.
Also make sure that the card you are applying for reports regularly to all 3 major credit bureaus. That way you can build your credit score up while making payments on time. Also, carrying a balance is generally a bad idea, even if you're paying the minimum due every month. Carrying a balance adds to your debt to income ratio, and can sometimes bring you down considerably when you are trying to secure a mortgage loan. A good rule of thumb when building your credit is to pay in full every month, and don't charge more than you are capable of paying back in full before the due date.
Always remember the words DEBT TO INCOME RATIO. This is very important. Because although your credit report and score goes a long way to getting you a loan, your debt to income ratio should also be in the back of your mind. What does that mean? Well, remember I said that you should have not only credit cards to build your credit, but also a car loan or personal loan? Don't get more of a loan than you can afford. Because that "loan" is also considered a debt. It is not necessarily an unpaid debt, but whether you make the payments on time or not, it is still a debt. Money that you owe for something out of your regular income on a recurring basis. This "debt" is considered when a lender is deciding how much of a loan you can reasonably pay back to them. So when you have a high debt to income ratio, you qualify for less of a mortgage loan, because you have less disposable income. The moral of the story is, the car loan or personal loan is very good and often necessary to build credit worthiness, but don't go overboard.
Good credit cards to get started
Capital One Secured Card
No processing fee or application fee. Low annual fee. Possibility of low down payment depending on credit score.
High interest rates
First National Bank Secured Card
Possibility to get approved for an unsecured card in as little as 6 months. $300 to $5,00 credit limit (dependant on how much you pay up front).
High interest rates
First Progress Platinum Elite Secured Card
No minimum score required. Reports to all 3 credit bureaus.
NOT available in all states
Wells Fargo Secured Card
Available to applicants with any credit history, as long as no bankruptcy in 12 months, and no unsettled liens. Comes with standard Visa benefits.
$25 annual fee
Credit One Card
Not a secured card. Tradional card offered to those with some credit faults. No deposit required.
High annual fee, and high interest rates
Do you know your credit standing?
How good do you think your FICO credit score is? Choose your best guess, then go check your score and see how in the know you really are!
Some tools to help you keep track of your credit score and report.
- Annual Credit Report.com - Home Page
- Get your FICO® Score | Credit Report Tools, Tips + Savings
Get the score that lenders use most, from the company that invented it. myFICO provides you immediate access to your FICO score and credit report online.
- Free Credit Score & Credit Report Card. No Credit Card Needed.
Instantly receive your free credit score and free credit report data online. Free credit tools to track and optimize your credit score. No credit card needed & no hidden fees.