If you’re preparing to buy a house, you’re probably taking a good, long look at your credit history – or perhaps lack thereof.
One of the most frequent questions our mortgage bankers are asked by customers is how to improve their credit.
If you want to take your credit score to the next level, whether your score is in the pits or you wish to up your buying power for the house you’re saving for – here are the five things Daniel Bortz from trulia says you should avoid with your credit:
If you’re seeking a home loan but having credit woes, you’re not alone! Understanding and striving towards a better credit situation is a path shared by many Americans, as evidenced by a recent Experian survey.
For individuals without any credit, securing a mortgage loan can be nearly impossible. Most of us know that a mortgage approval is based on several different factors, however, the largest factor is your credit – or more specifically, your FICO credit score.
Currently, FICO scores pulled from Equifax, Experian, and TransUnion are the only reports to measure a potential borrower’s credit worthiness.
But there’s a problem with that – some would be borrowers have so little credit that they don’t even have a FICO score at all, and because of that, some borrowers are turned down for mortgages.
However, all of this may be changing soon, according to an announcement by HUD Secretary Julian Castro and NAR President Chris Polychron earlier this month. According to the two industry specialists, the agencies are exploring alternative credit systems in an effort to expand American’s access to mortgages.
This announcement falls in line with last year’s statement by VantageScore – an alternative scoring system – that Fannie Mae and Freddie Mac, the two government loan agencies, were looking into updating their credit scoring methods.
Though it has not yet been confirmed that VantageScore will be used along with or in place of FICO scoring, this new development – if utilized – could work to change the game for many borrowers – 7.6 million borrowers to be specific.
Down payment requirements can be very intimidating, and trying to save for a 20% down payment can seem impossible. Luckily, the secret is out – you don’t actually need to have 20% for a down payment. Because, really, who has an extra 20 or 40 grand lying around?
Here are your options:
Go for an FHA loan – FHA loans, or Federal Housing Administration loans, are not actually funded through the FHA, they are simply ensured by the FHA. The FHA insurance covers the lender in the event that a borrower should default, and because of that, these loans are considered less risky for lenders. The FHA loan comes with a low interest rate and as little as a 3.5% down payment.
Check out a USDA loan – USDA loans are issued through the U.S. Department of Agriculture and are great for borrowers who are unable to save for a down payment because they require NO money down. Yes, that’s right. These loans offer 100% financing. What’s the catch? Well, there is none really. Though borrowers must meet location and income requirements, the location requirements expand much further than the countryside. In fact, some suburbs that surround cities fall within the limits.
Try a contingency – This is only applicable to those who are already home owners. Essentially, a contingency is a clause in your contract that states that a percentage of the equity in your current home, will go toward the down payment of your new home, contingent upon your first home’s sale.
Are you a veteran? The VA loan allows veterans and qualifying spouses to get a 0% down mortgage.
Even if you can’t come up with a down payment, you do have options, and you can still purchase a home. If you’re interested in purchasing your first home, check out our First Time Home Buyer’s Study Guide to learn about the process.
Questions? Call a mortgage banker at 1 (888) 914-2276.
Yes, you read the title right – student loans can help you get a mortgage. How? Well, there are a couple big ways that your student loans, and your history with them, can help you in your pursuit of a mortgage loan approval.
- Payment history – In terms of your credit, payment history is worth the most – 35% of your score. That’s a big number and it is going to be significant to your mortgage banker if you have a good payment history with your student loans. Not only is this the biggest credit determination factor, it’s also the easiest to control – just make your payments on time, every single month.
- Credit building – Without using credit, you have no credit. And sometimes, having no credit can be as bad as having bad credit. This is especially significant when you are trying to qualify for a mortgage loan. Without credit, your mortgage banker has less proof that you are not a risky investment. Student loans in good standing, even if they are your only form of credit, can work toward building your credit.
If you’re interested about learning the steps to becoming a home owner, check out our First Time Home Buyer’s Study Guide, or call and talk to a mortgage banker at 1-888-914-2276.
1. Proof of income
- You will need pay stubs (showing at least 30 days)
- If you have recently started a new job, your mortgage banker may ask you to provide letter from your employer confirming your salary
- All of your debt – student loans, credit cards, cars and even store credit cards
- Cash, cars, property and basically anything that is owned that can be sold or converted into cash
4. Down payment
- While this will vary depending on what loan program you qualify for, (some loans require no down payment at all) it’s a good place for you and your mortgage banker to begin deciding what type of loan you want
- Items like pay stubs, bank statements and identification documents are an important and necessary part of the mortgage process – for a complete list of needed documentation, ask your mortgage banker
Interested in taking the first steps to becoming a home owner? Check out our First Time Home Buyer's Study Guide!
It’s no secret that your credit is the single most important factor that is considered when you apply for any type of credit card or loan. There are tons of tips out there to improve your credit, but in addition to putting those practices into place, you should also know about what sneaky things have the ability to tank your credit score.
1. Maxing Out a Credit Card: This makes your credit utilization 100% and has one of the worst impacts on your credit score.
2. Not Knowing That Paying off a Collection Account Will Not Remove It: You can’t hide from FICO – the paid account will remain on your report for seven years.
3. Opening New Credit Cards to Increase Your Credit: You may think it expands your credit portfolio, but creditors could see it as you trying to max out your credit potential.
4. Not Using Your Credit Cards: You can’t build credit without using credit. Some creditors even have a time period after which your account will be marked inactive, and some will simply close neglected accounts.
5. Making Purchases by Using a Retailer’s 0% Financing Program: This offer is usually viewed as a last resort type of loan and could cause creditors to view you as high risk.
Did you know that you are legally entitled to one free copy of your credit report, from each of the three credit bureaus, every 12 months. You can obtain a free copy of your credit report online at www.annualcreditreport.com or by calling (877) 322-8228. If your credit report is accurate and, perhaps, not as high as you had hoped, check out these 10 simple tips to raise your credit score.
- Make Your Payments on Time: This is one of the most important things you can do to positively influence your credit score.
- Get Current on All of Your Accounts: Get current and stay current. Payment history accounts for 35% of your score and has the greatest impact on it.
- Improve Your Debt-to-Credit Ratio: Pay down your account balances and keep them low. The ideal debt-to-credit ratio is less than 30% utilized, so you should aim to reach that percentage.
- Pay off Miniscule Balances: One of the factors in credit assessment is how many of your accounts have balances. So try this: instead of charging $40 on three different credit cards, you can charge $120 on one card and keep the others at a zero balance. Just make sure you don’t close the zeroed out accounts, as this too can hurt your credit score.
- Keep Inquiries Within a Short Time Period: Every hard credit inquiry will cause your score to dip (usually a few points) for one year. While it is expected and beneficial for you to shop for the best rate, try to keep your time frame as brief as possible.
- Keep Paid off Accounts Open: Even if you don’t think you will use the account, your open accounts determine your account age; therefore, the longer the account has been open, the more it will positively impact your score.
- If You Have Had Credit Problems, Re-Establish a Clean History: When starting over, start small by opening new accounts and paying them responsibly. This will help you re-establish your credit history.
- Pay Your Fines: Some cities have begun to turn small fines in to private collection agencies. This could include items such as your delinquent library books and unpaid parking tickets.
- Ask Before You Purchase: Did you know that some cable and internet providers run a hard credit inquiry when you sign-up for their service? Protect your credit by asking companies about their policies before you sign-up.
- Don’t Close a Delinquent Account: It may seem counter-productive since you would like to remove it from your active account list, but if you close an account with a balance, it will cause your available credit and credit limit to be reported as zero.