Getting Credit Ready

Some people who are buying their first home or who wish to refinance their existing mortgage are so well qualified that any bank or mortgage company would give them a loan.  These people tend to have excellent credit and high credit scores, job stability and more than adequate income to support the proposed mortgage payment.   A quick conversation with a loan officer will let them know they are in this category.   Other would-be borrowers may have a more marginal situation.  This article is geared toward those people who may not be totally confident and/or who want to prepare for the future so they will be considered well qualified when it is time to purchase or refinance.

There are important things a consumer can do before applying for a loan, in order to get their credit profile acceptable to mortgage lenders.  It can take time to get it all done, so start now and you’ll be ready for the future.

Check your credit reports.  Under the Fair and Accurate Credit Transactions Act, consumers can request and obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies (Equifax, Experian, and TransUnion).  You can go to www.annualcreditreport.com to request a free copy of your credit reports.  This is the only site authorized by the three major credit bureaus for the purpose of obtaining a free copy of your credit report.  Each of the three reports will need to be requested separately (3 different requests).   The free reports received from the site will not provide you with a credit score but it will give you a complete copy of your credit history and that’s a good place to start.   As you go through the process of requesting your credit reports, you may be asked if you want to get the credit scores (for a fee).   While this is an option, please note that the consumer score they give you is usually different (usually higher) than the score you get when a mortgage lender obtains your credit report.  This is because the model for a mortgage credit score is different than the model for a consumer credit score.  The model for a mortgage credit score is designed to predict the likeliness that you will be successful in making mortgage payments.    Note:  if you know a mortgage loan officer, you can usually prequalify and have them obtain a 3-bureau report with credit scores.   Most mortgage programs do have a minimum credit score requirement.  Also, the interest rate you will be charged is often affected by your credit score (higher credit scores may get better rates).    Also, for people with lower credit scores, the underwriting criteria may be stricter.

Now that you have the credit report, take some time to review each entry.    Do you have any late payments in the past 12 months?    If so, then you must start making all payments on time.  There is a very low tolerance for recent late payments.  Are there any current delinquencies with past due balances or collection accounts?   If you are currently delinquent on an open/active account, you must bring that account current immediately and then you need to keep paying it on time.   Generally you need to have all accounts paid on time for a minimum of 12 months.  If you have unpaid balances on collection accounts, medical collections, judgments or accounts that were charged to P&L or an unpaid balance from a car repossession, etc, then this can be an issue if the outstanding balances total $1000 or more.   Most lenders will require these accounts to be paid in full prior to closing or you will need to prove that you have a written payment agreement and have been making payments per the terms of that agreement for a minimum of 3 months.  If you do have outstanding balances on older accounts, please try and determine the actual date the account went into a collection status.   These accounts are supposed to come off your credit report after seven year but often they do not because the way they are reported makes them appear to be more recent than they are.    You may need to do some digging and some research to get the date(s) the account(s) went delinquent.   If the creditor is not able to provide this information, you may have a case to dispute the account and get it off your report!    Are there any errors?  If so you will want to dispute this information too.  Each credit bureau has procedures in place for making disputes.   Is there any unfavorable public record information such as bankruptcy?   Lenders and mortgage programs have specific guidelines on dealing with these types of issues and may require anywhere from 2 years to 7 years from the date of discharge of a bankruptcy or foreclosure before they will give another mortgage loan.  Decide whether to resolve or dispute every negative item on your credit report.  Even small items such as a past due account with a utility company can show up and adversely affect your credit so take care of it now.  There may be some merit to using a professional credit repair company to assist you in disputing negative items on your report.

Lenders are generally looking for 3 open lines of credit that have been paid on time for a minimum of 12 months.   If you do not have 3 open lines of credit, then you probably should obtain additional credit.  It is hard to achieve a maximum credit score with an insufficient credit profile.

Next, look at the balances on your credit cards.   To get the ideal credit score, the balance on a credit card should be around 30% of the credit limit.   As the balance on a credit card starts to approach the credit limit, your credit score goes down.  If the balance on the credit card exceeds the credit limit, then you are probably losing a lot of points!     If you are unable to pay down the balances on your credit cards, consider requesting a credit limit increase.   This can help separate your balance from the credit limit.   If you are thinking of buying a home or refinancing in the future, then watching the balances on your credit cards is a very important step.   Aim to get the balances down to at least 50% of the credit limit (or lower if you can).    If you cannot get the balances that low then do the best you can; keep in mind that the balance of the cards compared to the credit limit is a big credit score driver.

Other rules of thumb are do not open any new accounts and do not close any accounts.   One exception, of course, is that if you do not have at least 3 open accounts then you should open new accounts so that you do have 3 accounts reporting on your credit bureau.   Also, if you have more than five accounts, then closing one or more of your newer accounts is ok (leave at least five open).    If you are going to close an account, it is better to close newer accounts and leave older ones open, when feasible.

If you have student loans then understand that the lender will qualify you based on the minimum payment due – even if the loan is deferred.    So check the student loans listed on your credit report and make sure that the information is accurate and that each loan reports a payment.   If deferred loans are not showing a minimum payment due (this is the norm) then you will need to request something in writing from the student loan companies stating what the minimum due will be.   This can get interesting because, for deferred student loans, the student loan company will give a statement showing what the payment will be for a regular repayment schedule.   In other cases the student loan company will show a choice of different payments but there is a notation that the loan is scheduled for regular payments (which means the lender will not choose to accept the lower payments available).   For some borrowers, the student loan payment(s) will affect the amount they can be qualified for and sometimes causes them to qualify for less than they want.    One way that some borrowers have resolved this problem is to literally take their loan(s) out of deferment and choose the payment plan with the lowest payment then put it back in deferment.  By taking these steps, the payment used by the lender to qualify you will be the lowest possible payment.

Also, if your credit history is marginal, it is quite common for mortgage lenders to ask you to provide 12 months’ cancelled rent checks.   If you do not pay by check, start!   If you do not always pay on time, start paying on time.    If you are asked to provide 12 months’ cancelled rent checks, this documentation could be the difference between your loan being approved and not being approved.    Not only is the lender looking at your payment history for housing but they are looking at what you have been paying versus what your new payment will be.   If you cannot document a history of paying rent, it could adversely affect your ability to get approved.

While these steps may not be all inclusive – it is hard to cover every possible scenario in a short article –  they will put you on the right track to qualifying for the best mortgage possible.  The months before buying a home are an important time to be frugal, avoid any negative impacts on your credit report, and make efforts to improve your credit score and history.

If you are purchasing or refinancing in New Hampshire or Massachusetts, contact Renee Duval at (603) 225-5626 or visit our blog at www.NHmortgages.com

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