Most of us, at some time or another, have done something to affect our credit rating, perhaps without even knowing it. A late or missed credit card or home mortgage payment is just one example. When you buy a home, your real estate agent will encourage you to get pre-approved for your mortgage. It's during the home loan application process when problems often come to light.
For home loan purposes, a score of 650 or higher generally indicates a good credit history and will make it easier for you to secure a mortgage. If your score falls between 620 and 650, your borrowing capability will be examined more closely. And if you rate below 620, you may have a credit crisis. When you’re planning on buying a home, your credit score will have a big impact on your interest rate and loan terms. If your score falls on the lower end of the scale, you’ll pay a higher interest rate. Dip too low, and you may not get approved at all.
Blemished credit is both stressful and costly, but it's not the end. As hopeless as the situation might seem, bad credit won't last forever. There are things you can do right now to begin improve your credit score.In my 12 years of being a loan officer I am always asked, “What should I do to fix my credit?” I normally recommend 3 things to do.
1. If you have a serious credit problem and/or a lot of collections (anything over 6 collections), I recommend you go to a credit restoration company. If your collections are $500 and under, I suggest you pay them and get them out of the way. As a rule, If your collections exceed $1,000 and are more than 2 years old, you can leave those alone for now. When you are trying to repair your credit with credit restoration companies its best to go with local companies, it would be most convenient for you. In addition to this, you would need to have at least 3 open and current lines of credit.
2. Secondly, if you do not have 3 lines of credit, you should open 3. Understand that if you have bad credit or low credit scores it would be difficult to find someone to give you a loan. Here’s the trick! Upon your first payment, you should go pay off 50% of your loan. For instance, if you get a line of credit for $500 pay off $250 on the first payment, if you get a line of credit for $1,000 pay off $500 etc. This will give you an immediate boost of 10+ points on your credit score. Just be mindful that you have to pay off 50% or more on your first payment.
3. Lastly, the easiest thing you can do is visit your local Credit Union and open 2 secure loans. If you are married open jointly secure credit lines. For the third account, open a secure credit card. You should only charge 10% of the limit and never exceed 10%, this will give you a boost on your credit report.
It's important to note that repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score.
If, after all your work, you still score below the 620 mark, it doesn't mean that you won't qualify for a home loan. It may mean, however, that your mortgage will take longer to process and the terms and interest rate may not be as good as you were hoping for. Talk to your real estate agent about referrals to high-risk lenders.
Repairing bad credit can take many months to a year or more. But when you're ready to buy a home, you'll be glad you took the time to improve your score - and your mortgage payment will be lower because of your efforts.
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