Wednesday, July 21, 2010
This article leans heavily on: Personal Finance 101: Know Your Credit Score
Free Credit Score - See yours at CreditReport.com!
With homes at near-bottom prices and mortgage rates at historic lows, a lot of consumers are jockeying to get into the homeowners market or to refinance their standing loan.
But there's one catch:
Getting approved for today's best mortgage products relies mostly on your credit score.
In addition, mortgage lenders are digging deeper than ever into homebuyers' credit reports, studying not only credit-card spending habits but ordinary bill-paying consistency and debt-to-income ratios.
Here is how to quickly and efficiently address the credit issues that mortgage lenders care about the most.
Typically, a credit score of 720 or above is the bar for qualifying for the best mortgage rates.
Many borrowers with lower scores may think there's nothing they can do to improve their situation, especially in the short-term, but that's a myth.
While there's no quick-fix magic to erase glaring blemishes, a borrower -- even with high levels of debt and a history of delinquent payments -- can start improving his or her score in immediate and dramatic ways.
First, it's important to understand that a credit report is a snapshot of your creditworthiness at the one particular moment mortgage lenders pull the report.
Scores can fluctuate a lot because most lenders update the credit bureaus on a monthly basis. But the amount the scores change is a little more complicated and depends on a series of factors, from your amount of available credit to paying your bills on time to the length of your credit history.
As when being photographed for a portrait, you want to look your best when lenders take a picture of your credit profile while still conveying an accurate record.
See your credit score: CLICK HERE
To help you see a bounce in your score and land a step closer to obtaining an affordable home mortgage, AOL Real Estate talked to some financial experts to find out some fast ways for consumers to address a less-than-desirable credit score and to start seeing results:
Tip No. 1: Pull your credit score
Before shopping for a home, you need to know your exact credit score and determine whether any wrong information has affected it.
According to Joel Ohman, a certified financial planner, around one-third of consumers have errors on their credit report and simply by pulling it, you can rectify those mistakes.
Ohman says depending on the flub, this could cause your score to spring 25 to 50 points.
You should see this adjustment reflected in your credit score before you apply for a home loan.
Cunningham advises allowing at least 3 months time to check your credit report before applying for a mortgage.
This allows for the time it takes to deal with the credit bureau, provide documentation, and then to see your score updated.
Consider subscribing to an online credit-score monitoring service for at least six months before you start applying for mortgages.
This will give you a crystal-clear sense of how different actions affect your score and how quickly your repair efforts register.
One big surprise: Large credit-card balances can hurt your credit score temporarily, even if you pay them off on time.
Tip No. 2: Pay down your debt
Before you take on a mortgage, you need to show lenders you can manage credit responsibly.
About 30 percent of your credit score is based on your available credit, which can be figured by taking the total of your credit card balances divided by your total credit card limits.
As you start paying down your debt and continue to do so over time, you are going to see your credit scores bounce.
But if you are saving up for a bigger down payment or to do a cash-in refinance, you may not have the spare dollars to completely wash away your liabilities.
If this is the case, then try to get as close as possible to the recommended level.
Typically experts suggest consumers use 20 percent or less of their available credit.
Tip No. 3: Target credit accounts that matter most to lenders.
Lenders are scrutinizing credit reports more carefully than ever, so it's important to target the accounts they'll be most concerned about.
Major credit cards are by far the most important.
But be sure not to forget about store credit cards, even those you rarely use.
It's easy to forget to pay a bill on a card you only use once in a while, but mortgage lenders will expect them to be up-to-date before moving forward.
Also, expect payments for doctor's fees, utility bills, and home equity lines of credit to be scrutinized, as well.
Tip No. 4: Piggy-back on good credit -- married couples can start anew when buying a home.
Another strategy to enhance your scores is to utilize the good credit of a significant other, a relative, or a very good friend, says Cunningham.
Get added to a credit card as a joint account holder, and as payments continue to be made on time, your credit scores will increase.
For example, if a husband with good credit adds his wife to his account, his history will be imported into her credit file and in effect, raise her score.
Cunningham says another way is to use a secure credit card, a credit line that requires a cash collateral deposit. This means you put a $1,000 in cash down for a credit card and then you can charge up to exactly that amount on the card.
The purpose is to have the issuing lender reward you for using the card and report back to the credit agencies. Just confirm before arranging for the secure card that your lender is going to report your payment history to the credit bureau.
Tip No. 5: Attempt to increase your existing credit limits, but don't open new accounts.
Most mortgage brokers say you should stay financially static during the application process and avoid starting an new credit lines.
But your score can actually benefit from increasing your credit limits, part of the equation that determines your percentage of available credit.
If you have been a responsible owner of a credit card, you may consider asking the issuer if they will raise your credit card limit.
However, this should not be confused with opening new credit cards and lines of credit, which could have an adverse effect on your credit.
"Someone opening five or six credit cards at one time may have a budget problem," says Ohman. "In the short term, it could be seen as a negative."
Opening up credit -- such as applying for multiple credit cards, a car lease, store cards-- around the time you apply for a home loan can compromise your position as a borrower.
Tip No. 6: DO NOT keep paying bills LATE -- especially your mortgage payment.
Forgo the defeatist mentality, because starting to pay your bills on time can start to correct your dismal credit score. About 35 percent of your credit score is based on whether you pay your bills on time. You just have to meet the minimum by the due date.
For those who are already homeowners, paying bills on time also includes your current mortgage payment. Scott Gamm, founder of a money management website, says that bankruptcies and foreclosures can cause your credit score to drop 150 to 200 points and that this discrepancy will be a fixture on your credit report for the next seven to ten years.
Robert's response: "I will NEVER agree that it will take 7 to 10 years for someone to learn to be responsible with their credit...
Think about it...
How long would it take YOU to learn any major lesson? one or two years... (maybe three...) ???
Why does the system require 7 to 10 years for an item to be removed from someone's credit report? People get out of jail after committing major crimes in less time than that.
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