Insider Secrets on Your Credit History?

Tuesday, June 15, 2010

by Dede Stoner - Guild Mortgage

Do you have a dream of owning your own home someday? Wouldn’t you like to take the rent you are paying today & apply it to your own home? Here are a few secrets to know to increase your ability to be approved for a home loan now, or in the future!

Credit is a huge factor when approving someone for a home loan…credit score, credit history(past, present, future), type of credit, balances of credit, age of credit…if you financially can be approved for a loan, but do not have any credit, or have unresolved blemishes on your credit, your loan may be denied. Let’s look at each of these individually…

1. Credit Score-you will need at a FICO score of at least 600 in order to obtain a home loan…in some cases, if the score is below 600 & we have good compensating factors(good job history, good wages, good bank reserves, good debt to income ratios), we may be able to make an exception.

2. Credit History-how you have used & currently use your credit plays a big part in the approval process. The lenders want to see that you are making payments on time & are not over-extending yourself w/large purchases, maxed out credit cards, etc, because they don’t want to put you in a position of not being able to make your mortgage payment(or any other payments) in the future. It is okay if you have had credit challenges in the past(we all have), as long as those items have been cleared up & you have built good credit since that time. A good example would be a bankruptcy…we understand life happens & bankruptcies are a part of life. As long as you have maintained a good credit history since that time, you will have a good chance of being approved for a home loan. This is the same with collections, as long as the collections are paid & a clean credit history has been built, the collections will not have a negative effect on a home loan approval. Making your payments on time is also a major factor in determining credit scores…one 30 day late(a payment made more than 30 days past the due date) can drop your score up to 100 points, even if it is just on a credit card. It is important to make those payments on time each month.

3. Type of Credit-the type of credit on your credit report may not play a direct role in your loan approval, but it will have a direct effect on your credit score, which in turn will have an effect on your approval. It is best to have a mix of debt on your credit report, for example, secured installment loans, student loans, revolving(credit cards)…the type of debt that has a negative impact on your score are unsecured loans, & loans from high risk institutions. These loans are considered high risk due to the lack of collateral & will have a negative impact on your score. It is best to take out secured loans when you can.

4. Balances of Credit-The biggest impact to your credit score regarding the balance of the debt comes from credit cards. The credit bureaus are aggressively lowering credit scores when the balance owed on a credit card is close to the credit limit…if you can, it is best to pay the cards off each month, or keep a balance that is less than 30% of the credit limit. If you go over the credit limit, your score may be impacted as much as 50 points or more, so it is important to keep an eye on the balance of your cards.

5. Age of Credit-In order to accurately determine someone’s ability to repay credit, you need to have debts actively reporting on your credit report for at least 12 months. What the lenders are looking for specifically is 3 open & active tradelines(open debts on credit report) that have been reporting payments for at least 12 months. If you don’t have at least 3 open/active debts, we can verify a 12 month rental history & verify a 12 month utility history. Having no credit, or paying cash for everything can affect you just as negatively as having bad credit. When someone does not have any credit, it is hard for the lender to determine the credit worthiness of a borrower because there is no payment history to be verified. It is especially hard when someone has been living at home & doesn’t have any debt to their names because everything is in the parents’ names & cash is paid for everything. It is vitally important to build your own credit history…you can do this by opening up a few low limit credit cards, charging a very small amount on them & paying them off each month, so you can begin to build a payment history with the credit bureaus. If you are living w/roommates, it is best to get your name put on the lease, so we can verify a rental history for you. It is also important to get your name put on utilities so we can verify a 12 month history to help build a payment history, in case you don’t have 3 debts on your credit report to verify.

Don’t let unresolved credit blemishes scare you away from trying to get approved for a home loan. One way to get those cleared up is to call the creditors & negotiate a lower settlement with them(as most of the balance is probably from fees & interest charges), or set up a payment plan to get those items paid off. This is beneficial to you as it will help clean up your credit, will increase your credit score, & if on a payment plan, will help build a payment history.

With these insider secrets, you can prepare yourself & your credit to be approved for a home loan! With record low interest rates, good home inventory & great home prices, now is the time to look at getting your own home!

De De Stoner