How your Credit Report Can Make or Break a Mortgage
The media has finally injected some creativity and humor into the world of credit scores. Beginning with the slacker-dude in the catchy FreeCreditReport.com commercials to the recent ads portraying the low credit score as a flea-bitten mutt, credit scores have emerged from the dark crevasse of financial lending into the limelight--and thank goodness for it.
Before the Great Recession, a good credit score was important to obtaining a traditional mortgage, but not imperative. Toward the end of 2006, people were closing on adjustable, interest only mortgages with terrible credit and no money down--hence the recession.
After being slimed by an exploding housing bubble, lenders are taking stock in what happened during the turn of the century and have re-adjusted how they make loans. No longer are driver’s license mortgages being deployed. In fact, loan officers are only stopping short of asking for your first born to grant a mortgage.
That’s why now is the time to take a long, hard look at your credit report to determine if you are a favorable candidate to obtain a mortgage. Before 2007, buyers had no problem obtaining a traditional mortgage without paying points if their score hovered in the mid-500’s. However, don’t bet on that kind of treatment today. According to MSNBC Business, the lowest credit score you can get away with, without paying points, is 660.
What Happened to My Credit?
It may be shocking to view your credit report--a lot like stepping on the scale after the holidays. What happened to my credit score? If you haven’t been carefully monitoring your credit score through the years, you may find a variety of inaccuracies, old debt, and even judgments against you that you can’t recall.
Credit reporting agencies receive information every time you miss paying a bill or rack up too much credit card debt. Your financial activity directly impacts your score, so staying on top of your report is imperative to staying in the game.
The Federal Trade Commission suggests that every American receive a free copy of his credit report through Annual Credit Report. Once you have the report in your hot little hands, go through it line by line with a fine tooth comb.
Your credit report tells the story of how you’ve been spending your money for the past several years. It’s your job to uncover the reasons why your credit report is unfavorable.
Beware of the Easy Way Out
If you find that your credit score is too low to obtain a mortgage, the first step is to remedy the situation. Some people are turning to an outside source to assist them with credit repair. Many of these credit repair companies promise to fix your credit report by virtually erasing bad credit. However, if it sounds too good to be true, it probably is. In fact, the Federal Trade Commission (FTC) says that you should be leery of a company that asks for a fee in return for removing bankruptcies, liens and bad loans from your record.
Some warning signs that the credit repair company may not be on the up and up includes not explaining your rights or telling you which areas you can handle for free, a suggestion to invent a new credit identity, advising you not to contact any of the three main credit agencies directly or that you should dispute all information on your report, regardless of its accuracy.
Repair Your Credit--Yourself
You can repair your credit report yourself and get on the path to a better score. You can’t change the past, but you can address areas of the report that may be inaccurate.
Start by writing a letter to the consumer reporting agency disputing specific information that you believe to be inaccurate. Include copies of any documents to back up your claim and maintain a copy of your dispute letter in your files.
Next, in writing, contact the creditor or provider who reported the information to inform the party that you disputed the claim.
In the event the negative information on your credit report is true, your only defense is time. It can take up to 10 years before a bankruptcy or an unpaid judgment against you is removed.
My Credit is Still Poor--Does that Mean I Can’t Get a Mortgage?
Although many lenders have tightened their standards, that doesn’t mean that getting a loan is impossible. Before meeting with your lender, resolve your credit report. Dispute inaccuracies and contact your creditors to get on a payment program.
Once you are back on track with a few months of bills paid on time under your belt, reach out to your lender and have a frank, honest discussion. Remember, your loan officer is on your side and wants to help you obtain that mortgage.
During the meeting, ask about the financial institution’s credit standards and what it looks for in a qualified loan candidate. Not all financial institutions adhere by the same standards--some give credit to those who have taken the necessary steps to rectify their credit.
If you still don’t qualify for the mortgage that you can afford, ask your lender what steps you can take to improve your standing at the financial institution.
Federal Trade Commission. Your Access to Free Credit Reports. AnnualCreditReport.com
Schoen, John. What Credit Score Do I Need for a Mortgage? MSNBC. 26 January 2009.
Federal Trade Commission. Credit Repair: How to Help Yourself.