Today’s mortgage lenders are a lot more cautious about whom they pass out mortgage loans to. During the heyday of the housing boom, even borrowers with suspect credit – not to mention high levels of debt and shaky job histories – were able to obtain mortgage loans with low interest rates.
Thanks to the credit crisis currently gripping our nation, this is no longer the case. Today, borrowers better have solid credit if they hope to qualify for any mortgage loan at all.
What if your credit isn’t the best? Don’t panic. You can rebuild your credit score. It will take time, and you may have to put off your purchase, but it can be done. Mortgage bankers and brokers can help, too, and often do work with potential borrowers to improve their credit scores as part of their service.
First, order copies of your credit reports from the three credit bureaus, Experian, Equifax, and TransUnion, something you can do for free by visiting AnnualCreditReport.com, a Web site that is owned jointly by the three bureaus. The credit bureaus occasionally make mistakes. If you find a mistake on your report, you need to correct it. Doing so might boost your credit score. Unfortunately, this takes a fair amount of time, so be sure to check your credit reports well before you’re ready to start applying for a mortgage loan.
Secondly, if your credit score is low, that’s a sure sign that it’s time to eliminate your credit-card balances. According to the Federal Reserve, the average amount of credit-card debt in this country now stands at $8,700 a household. You can’t have this much debt on your cards, though, if you want a good credit score. The credit bureaus consider revolving credit-card debt to be bad debt. If you pay off your balance every month, of course, there is no negative impact on your credit.
Remember, too, that the credit bureaus keep a close eye on your ratio of credit used to credit available. For instance, if you have a $10 balance on a credit card with a limit of $100, your ratio of credit used to credit available stands at 10 percent. That’s worse, actually, than having a balance of $10,000 on a card with a limit of $200,000. In this later example, the ratio of credit used to credit available stands at a healthier 5 percent.
Next, pay all your bills on time. Even if you’ve not done this in the past, start doing it now. Late payments are the number-one reason why people have bad credit scores. If you consistently pay your bills on time, your credit score will rise.
The unfortunate truth is that all three of these steps take time. You can’t turn a bad credit score into a good one in a day, no matter how many spam e-mail messages promise that you can. This means you may have to wait a year or more to buy a home. Don’t view this as a negative. Look at it instead as a chance to rebuild your credit score and improve your financial health at the same time. If you do both, you’ll truly be ready to become a homeowner.
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