This blog came about from an email with a friend- I felt that there are probably a lot of people out there who could benefit from this, so I edited out anything personal- If the flow seems broken because of it, I do apologize, I tried to fix it as best I could.
There are a lot of ways you can improve the credit score you have, and most of them come down to paying off outstanding or long held debts, and responsible use of whatever revolving credit you may have (credit cards are an example of this kind of debt). Past due balances have the worst impact on your credit. As far as a home loan is concerned, things like vehicle payments and other scheduled debts will not be reflected as debts on your report IF you have less than 10 months remaining to paying them off. The history of payments you had with those will be considered as part of your record, however the debt owed will not be reflected as part of your debt to income ratio when you apply for a loan.
Lenders look at (in addition to your credit score) how much money your household brings in, and how much debt you have to pay against with that income. There are not any lenders out there who will lend you an amount that would cause your monthly payments to be more than 45% of your monthly income (except perhaps hard money lenders, but those loans tend to be quite expensive in terms of interest), and only if your debt ratio does not exceed a certain percentage of what is left. What that percentage is will vary from lender to lender and loan program to loan program.
There are still loans available for sub-prime borrowers, despite what the news says about the state of the mortgage industry. Sub-prime will mean a higher interest rate and a required amount of down payment, but again how much will depend on the loan program, your individual credit rating, and credit history.
Some loans require the down payments to be your funds and others do not. Even most of the ones that require the money to come from you will accept down payment assistance grants as part of that, however it prevents you from asking the seller to help pay some of your costs.
If buying a house hinges on your credit right now, my best advice to you would be to pay off any old debts you have. If they are small ones, just send a check and be done with them. Larger ones you may be able to dispute and either reduce, or if they are very old or have been sold from one collection agency to another a couple of times, you may even be able to get them dropped entirely. Really old ones I would not bother to contact- They may resolve themselves as "Uncollectable Debts" and go away (I wouldn't wait for all of them to "Go Away" if I were you, though), and contacting a creditor on a debt you haven't heard about in 6 1/2 years will only re-alert them to you and drive them to re-attempt to collect. I would advise that you avoid the "Credit Clean Up" and debt consolidation companies unless you've just got a HUGE amount to deal with, all they really do is charge you a bunch of money to do that which you can do yourself. It's not very comfortable to make the calls to your creditors, and that is the one advantage I see to those companies is that they make the calls for you, however almost every credit card company or debt collection agency will negotiate with you if you call and ask. They just want their money, and don't want to chase you down and send you a bunch of "Over-Due" mailers.
If outstanding debt isn't the issue for you (I covered it first because it is for sooooo many people in America), and it's more a matter of not enough credit, your best action (and this should be part of your plan even if you are in a "Bad Debt" situation) is to either take a credit card that you have or go out and get a credit card and use it. However, when I say use it, I mean use it right. Don't buy stuff you can't afford with it, don't buy stuff just because you always wanted one... use it to buy the stuff you would buy with a debit card- Things that you would have bought anyway like gas or groceries. And then pay off the balance every month. With out failure. Keep a small open balance on the card, say $25/mo that the card company can collect interest on, but don't carry any more than that into the next month. This way, you'll establish a credit history without paying a lot of interest to get there. If you already have credit cards- DON'T DESTROY THEM!!! Even a long bad credit history is better than a short good credit history. Keep the oldest card you've got, treasure it and protect the account, even if it's the one you've got that has the highest interest rate. The longer your credit history, the more comfortable lenders are with the terms they are willing to give you.
Certainly seek the advice of a loan officer or Mortgage Broker. The best of whom will help you put together the plan you need to get back on track, and can offer you advice on how to pursue the corrections and who to contact. This isn't a "Quick Fix"- Those don't exist- But for most people the overwhelming trouble they've found themselves in isn't as big as it looks, and a little down-n-dirty hard work can make all the difference in the world. You just have to start and act, rather than wait and react.
And keep moving forward. Success is a journey, not a destination.
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