In the first installment of this series, How to Understand and Improve Your Credit Score - Part 1, I gave an overview of how credit is looked at when applying for a mortgage. The second installment covered the factors that make up your Fico scores, one of the biggest issues in qualifying for a loan. The third installment showed 10 tips on how to manage your credit and raise your overall scores. This installment will deal with why you can do if you have mistakes or problems on your credit report.
Correcting Mistakes and Dealing with Problems on Your Credit Report
If you are planning on buying a home, good credit is crucial to being approved for a mortgage. So what happens if you have mistakes or problems on your credit report? Your situation depends on how serious the problems were, and how long ago they occurred. If the problem was from years back you might be surprised at what we can do. But even if the problems are more current, there are still options.
Most of the sub-prime loans have disappeared, but depending on your situation and what compensating factors you can show, you may be in better shape than you may think. FHA, a government program, is more lenient of past credit mistakes, and can be a great option for many borrowers. The key here is to be able to show that the circumstances that got you in trouble have changed, and you are now able to use credit responsibly. Many people think that after a bankruptcy, for example, they won't be able to buy a home again for years if at all. But depending on the causes, you may be able to buy, at good rates, as soon as a year or two after the discharge once you have reestablished your credit. It also depends on your specific circumstances. The best thing you can do is talk with a qualified loan officer and have them review your credit and your goals. 
Another option is to take steps to clean up your credit report. Mistakes on credit reports are surprisingly common. (On my own credit report I've had mortgages listed on properties I've never owned, and a collection account for someone with my same name who lived in another state.) Because of this a process has been put in place for consumers to dispute incorrect items on their credit report and have them removed.
As a first step, you need to get a copy of your credit report and decide which items you want to contest. Next write the credit repository (Trans Union, Equifax or Experian - this can all be done on their websites). Explain that the information is incorrect and that they need to investigate the information and remove it from your report. If you have any documentation to help your case, include the documentation, but you are not required to show proof. Once the credit repository gets this, they are required to investigate it within a reasonable amount of time (30days), and if they can't prove that the information is correct, they have to remove it from your report.
To investigate the disputed item, the repositories send a form to your original creditor asking for further information. At this point a 3 things can happen:
- If the creditor fills out the form and sends it back stating that the information is correct, the credit repository will reject your dispute, and the item will remain on your report.
- If they agree with you that the item is incorrect, it will obviously be removed.
- In many cases the creditor simply doesn't respond. If they don't respond by sending the form back within the 30 day time period the credit repository is required by law to remove this item from your credit report. They are also required to notify the other repositories that the item is incorrect and they too are required to delete it from their files.
It's possible to clean up problem spots on your credit using this approach, but you will need to be disciplined about following through, and it may take several attempts before you see any progress. It is also common for an item to be removed, and then show up again later, so you need to monitor your credit on a regular basis.
You've probably seen ads for companies that claim they can fix bad credit. These companies use this same method but most charge huge upfront fees, and if you don't know who you're dealing with, you could spend a lot of money and end up with no change in your credit.
If you have had credit problems, the best thing you can do is to first bring all your debts current and make sure you continue to pay your bills on time. Taking action to fix mistakes will help you raise your credit score and help you to qualify for a mortgage.
Pete Thompson is an Illinois based mortgage banker who provides superior mortgage service and competitive mortgage rates in Chicago, the Chicago area and throughout Illinois. Click here for a Free copy of The Real World Home Buyer's Guide - How to Save Thousands when Buying a Home and Getting a mortgage.
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