How to fix your credit score when buying a home
From Credit.com 8/25/14
If you have been turned down for a mortgage or quoted rates and fees that seem too high, you may have some homework ahead. The minimum credit score to land a mortgage is 620. If you have the capacity, and are in the position to do so, there are some things you can do to help save your credit and your mortgage.
Contrary to popular belief, credit scores do change, and can even change more than once within a 30-day period. If you have either applied for a mortgage and learned your credit score has dropped, or your loan is in process and there is a change to your credit score, taking the appropriate action can still keep your loan together. One way of the ways a quality lender can help is offering a rapid re-score service. A rapid re-score service allows you to make a change to a credit obligation, by providing to the lender supporting documentation of whatever action you took, which they in turn use to work with your creditor to raise your score. You can expect results within 48 hours.
1. Fix Maxed-Out Credit Cards
Carrying credit cards with maxed-out or near maxed-out balances can be catastrophic to a credit score. You could have no delinquencies, no derogatory credit of any kind, but carry high balances on your credit accounts your credit score could be lower. If you’re looking to increase your credit score, you should pay down your credit cards to at least 30% of the total credit limit. If your credit card has a limit of $1,000, you never want to have a balance above $300, for example. Your total allowable credit line multiplied by .3, tells you the balance you never want to exceed.
2. Don’t Close Credit Cards
Don’t close credit cards, even if you are not using them. This can be hugely detrimental to your credit score because it reduces your available credit – and it can raise your debt utilization ratio if you’re carrying debt on other cards. If your debt utilization ratio goes above 30% after you close your cards, your credit score could drop. After applying for credit, if you feel you’re not going to use a particular credit card, simply stop using it, but do not voluntarily close the credit card with the creditor. The creditor may eventually close the account due to activity anyway, but this usually occurs long after the card is opened. Moreover, during that time, you get the benefit of having an open credit line reporting favorably to the credit bureaus.
3. Reverse Late Payments
Late payments on a mortgage are by far the worst possible derogatory credit item — beyond a bankruptcy, short sale or foreclosure — that substantially reduces credit scores. This is also true with other credit accounts like car loans and credit cards. If you have a legitimate reason why you were late and you can provide supporting documentation to your creditor – a billing mishap, for example (after all, mistakes do happen), then pursuing a late payment reversal can help raise your credit score.
4. Stop Credit-Shopping
Make all your payments on time, keep your balances in check or ideally pay them off in full each month and do not apply for multiple types of credit within a 30-day period of time. In other words, applying for a mortgage, car loan and credit card all within a one-month timeframe does reduce your credit score because it represents a credit risk to the credit bureaus. Consumers can get into trouble especially when they are applying for different types of credit and hoping their credit score will not adversely be affected.
5. Consolidate Debt
If you don’t have the financial means to pay down your credit balances to 30% of your credit limits, you might want to consider consolidating your debt. For example, if you carry a balance of $2,000 against a credit card with a $3,000 credit limit, you might want to consider getting a new card with a $10,000 limit. This will boost your total available revolving credit to $13,000. Transferring that debt to the higher-limit card will put you at 20% debt usage for that card, and about 15% for your overall credit limits. This can raise your credit score. Also, consolidating debt, say with a low-interest card or using a personal loan with a low interest rate, also reduces your minimum payment liabilities. This increases your borrowing power. Increased borrowing power with a higher credit score increases your odds of getting a mortgage.
Keep in mind that lenders typically don’t like to see new credit accounts when you apply for or are in the process of getting a mortgage — if you decide to do it on your own. However, it’s a different story if you do this under the tutelage of your loan officer, so everybody can work cohesively together and make the appropriate adjustments during the process. These actions can also be taken in the infancy stage to get officially pre-approved.
6. Opening New Credit
Here’s another move you should do in consultation with your lender. Sometimes the best way to come back from a tarnished credit history is to open up new credit and start with a clean slate. Start small and work up — opening up a secured credit card with a local bank or credit union or even an online financial services provider can be a wonderful first step in starting over. After six months of ‘paid as agreed’ history, you will be on the right track to building enough credit to obtain more credit. Next, apply for a new credit card. Once this card is in good standing for the next six months, you can plan on having a higher score, which can get you better terms on other credit obligations, such as loans, consumer credit products and certainly mortgages. Keep in mind that applying for new credit will result in a small, temporary drop in your credit scores.
Staying on top of your credit is ultimately a good thing — whether you’re applying for a mortgage or not. Keeping your credit standing in good shape at all times, if you can manage to, will come in handy because sometimes you need good credit when you least expect it. And when you do need it — like if you’re planning to buy a home — your job in building or maintaining your standing will be that much easier. At the very least, it’s important to know what’s on your credit reports — to be aware of errors or signs of fraud, or to keep an eye on negative items — and it’s good to take advantage of your free credit reports, which you can get once a year. Monitoring your credit scores (which you can do for free on Credit.com) can also give you a good idea of where you stand, and if you see any big, unexpected changes, that’s a sign to check your credit reports for any problems that you should address.