This is a follow up, or a sister article to my discussion about establishing credit, which can be found at www.eashmortgage.com on my blog page. You may want to read that one as well. In these articles you will find time tested and proven advice to improving your credit specifically related to getting the best mortgage loan.
Just to be clear. I am not a credit counselor or credit repair expert. I am a mortgage loan officer with years of experience looking at credit reports and helping people qualify for loans.
A large percentage of people that I talk to on a daily basis have credit that has been damaged in one way or another and it is either keeping them from qualifying for a home loan or causing them to accept terms that are less advantageous than if their credit was better.
I could group these clients into 3 groups: Those who want more options; Those who almost qualify; and, Those who have a lot of work to do.
Those who want more options
These are the potential borrowers who have a good enough score to qualify for some type of loan, but they want to work on their credit to give them more choices. For example, in the case of conventional loans, everything is ‘tiered’. The more you put down, the better your rate. The better your FICO score, the better your rate. Even more significant sometimes is the fact that the better your credit score, the lower PMI rate that you will pay. This can be more significant than the actual impact on the interest rate itself.
Another example, is the buyer who has a score that only qualifies them for an FHA loan, but they would rather have a conventional loan. This example leads me into my first piece of advice.
• Don’t kill yourself to get a small bump in your score. It may not make that much difference in the grander scheme of things.
I’ve talked to a lot of people with a 700 credit score that can only hope to get their score up to 720. This is not usually worth the time – or worse yet – the money that they have to throw at the problem to get results. That money could go to better use. (I’m not a big believer in ‘buying points’, but you could make an argument that money spent on points to get a better rate would be a better investment than paying down a certain debt to try to accomplish the same thing)
That’s all I want to specifically say to this group. Otherwise my advice to the next group is the same for you.
Those who almost qualify
These are the potential borrowers who really need 10-60 additional points on their credit scores to qualify for the program that they want, or any program at all.
You got in this boat by some unfortunate turn of events or by making some bad decisions. You may have some late payments on your record. You may have some collection items. If you have active credit, it may be maxed out. But it’s not TERRIBLE. You’re close to qualifying. There are a few things I can tell you:
• Don’t lose heart. I have helped a lot of people in your shoes. You’ll have to be diligent. You’ll have to work. But you can see results. There is a light at the end of the tunnel.
• You can’t usually do much to fix the things in the PAST. So we’re not going to START with them. You may need to address them, but we will work on other things first.
• I’m assuming that you realize that PAYING EVERYTHING ON TIME is critical. If you can’t do that, nothing else I’m telling you matters.
Besides making timely payments, credit utilization is the biggest thing you can control. What is that? It is the percentage of your credit limit that you have used up at any point in time. This is why credit cards, also known as revolving debt, play the biggest role in repairing your credit. So my next piece of advice:
• If you don’t have at least one credit card, get one (see my establishing credit article for more detail)
• If you do have credit cards, then the biggest thing to improve your score is always to PAY THEM DOWN.
This takes us back to credit utilization. There is an inverse relationship between your credit card balances and your credit scores. If your cards are maxed out or over limit, that is a big hit to your scores. Anything above 50 percent of your credit limit is a negative factor. Then, the closer you get to ZERO balance your scores can improve dramatically. So, to someone who has a few credit cards, paying them down is always the first advice.
If this isn’t enough to get your score to where it needs to go, then we start looking at other things. These things typically have less impact than those above.
• Try to get collection items deleted. Paying off collection items usually doesn’t help much unless you can get the collector to agree to DELETE the collection. Read my lips, marking it PAID does very little. If they won’t DELETE, I would hold off on paying them. If you just paid off a collection and are reading this, ouch, you have no leverage now to go back and ask them to delete your item.
Then, I have one other thing for you to put in the NOT TO DO category.
• Don’t DISPUTE anything that you know is legit.
There are credit repair scams out there that tell you to dispute everything. Wow. Your scores go up a lot. Cool. No, not cool. Bogus. No lender is stupid enough not to see through this ‘technique’. Disputes on non-zero balance accounts – other than medical or police reported identity theft – have to be resolved, or removed, prior to loan approval, because everyone knows that they artificially improve your scores.
So, on the other side of the coin, if you truly do have something that actually should be disputed, make sure that you have 2-3 months to see any results. Sometimes longer. (This is one of the reasons that I recommend to people that we don’t wait till the last minute to check your credit)
To help tie this all together, I can help with a game plan with all of the above. I have a connection that can run a ‘what if’ simulation for you to determine what steps will make the most difference. I definitely recommend doing so before spending a lot of money fixing the wrong problem.
Those who have a lot of work to do
This is the group that needs 60+ points just to tread water. I don’t have any quick fixes for this group of people. A professional credit repair agency may be the best place to start. They will help you dispute as many things as possible, which can result in items being deleted that don’t have a valid paper trail. They can help negotiate settlements on your collections. If you are too deep in a hole, I hate to say it, and a few years ago I thought I would never say it, but some form of bankruptcy may be your best solution.
If you file bankruptcy, be aware that you will need to re-establish credit afterwards. You will need to show that you have taken your second chance seriously and have learned how to handle credit – and debt.
I am not a credit counselor or credit repair expert. The information provided here is based on observations that I have made over the years and information that I have put together from those expert sources. There is no guarantee of exactly how much your credit will improve by following this advice or if it will be enough to qualify for a specific program.
Sources: credittechnologies.com, myfico.com, consumerfinance.gov