Re-Establish Credit For Mortgage
In this Resources Guide in Non-QM Mortgage Lenders, we will cover how to rebuild and re-establish credit for mortgage and purchase a home. Mortgage loan programs require a minimum credit score requirement to qualify for a home mortgage.
Besides being able to qualify for a mortgage, mortgage lenders price rates on the borrower’s credit scores and credit profile. Therefore, you will find this guide on re-establish credit for mortgage and improving your credit profile important to your journey to homeownership.
Re-Establish Credit For Mortgage to Buy a Home
Despite our best intentions and efforts, we can all find behind our finances. This is true for all economic levels. 10% of individuals who earn over $100,000 are living pay to pay. 25% of those who are actively employed can’t put away money for savings. Once you start falling behind on bills and turning in payments late, it affects your credit score.
How Long Does Re-Establish Credit For Mortgage
People will start to rely on credit cards for day-to-day living and cannot pay down the balances. Regardless of popular opinion, it is not always an individual’s fault. The percentage of people who live pay to pay and have high credit card debt increased by almost 10% through the pandemic. This is a problem in and of itself. Buying a home becomes an even bigger issue. Most lenders will check your credit scores and payment history on your credit report. So can you purchase a home with a bad credit score? Yes.
How To Improve Credit Scores and Re-Establish Credit For Mortgage
Your credit score is fluid. It can change as often as monthly. It is based on many factors. There are three major credit reporting agencies. These are:
- TransUnion
- Equifax
- Experian
These bureaus factor in all your credit cards, auto loans, mortgages, student loans, and any revolving creditors. Credit scores range from 300-850. 850 is the best score you can have- the higher your score, the better. Most buyers have a score of around 650-750. To qualify for a mortgage, your score must be at least 620.
The Best Way To Boost Your Credit Is to Have Low Revolving Credit Balance
Your credit card debt is considered a revolving credit line. Lenders like to see that your credit cards are under about 10% but not paid completely off. You should not have maxed out cards, either. This is called the Utilization Ratio. The more debt you have on credit cards, your score will be lower. This is temporary and will bounce back up if you pay down your cards.
Dispute Legitimate Errors on Credit Reports
Although credit disputes are not allowed during an actual mortgage process (other than medical disputes), it is important that you check your report prior to the application. If you notice disputes, you should start the process then. It can take time and months to clear disputes, hence starting early.
Have Documentation of Errors on Credit Reports
An error on your report could signal identity theft as well. If you have not noticed the errors until you have started the application and approval process, talk to a loan officer who can assist you in doing a rapid rescore. This is only if you have concrete proof that there is an incorrect charge on your report. If the charge is over two years old, it will have little to no effect on your score, so there isn’t much point in disputing it.
Credit Repair During the Mortgage Process Not Recommended
It is not recommended that you take on credit repair during the mortgage process, at least not through the credit bureau. If you need to negotiate with collectors, you must do it before starting the home-buying process. An individual could also call the debtors directly and work out a deal.
Negotiate Recent Collection Accounts With Creditors
A debtor will often remove the negative credit item if you negotiate. You could pay less than owed and get it cleared. You just need to be sure to do this before starting the mortgage process. If a debtor verifies that a derogatory item is valid, it will remain on the report. If it is found that the derogatory mark should be removed, they have to remove it within 30 days. Nearly a third of all credit reports have errors. This ends up costing the potential buyers because of higher interest rates, larger down payments, and fees that occur with lower credit scores.
Steps To Rebuilding and To Re-Establish Credit For Mortgage Process
A secured credit card is a card that you put money down on, similar to a deposit. Most secured credit cards run reports to the credit bureau, so this will work in your favor if you do it responsibly. Attempt to get three secured cards and ensure that all the bills are paid on time monthly. Each card can boost your credit score by 20-50 points!
Never Close Out Revolving Credit Tradelines With Zero Balance
Do not close old credit cards. Contrary to popular belief, you should close cards – lenders like to see that you have some credit history. Be an authorized user on a friend or family member’s card. If you know someone who has good credit, ask them if they will allow you to just be an authorized user on their card. You do not need to have access to the actual card, but you will get the benefits of their good credit!
Make All Monthly Debt Payments Timely
Pay your bills on time! This is the number one thing that affects your credit score. If you are struggling to pay your bills, contact the lenders or companies to see if you can work out a more manageable payment plan. Lower score/Higher risk. A lower credit score means higher risks for lenders. Higher risk for lenders means higher mortgage rates.
Avoid Multiple Hard Credit Inquiries
If you apply for credit, you have pulls on your credit. These are called soft and hard pulls. If you apply for a car, it’s a hard pull. If you get a preapproved credit card in the mail, it’s a soft pull. If you apply for multiple mortgages, you get hard pulls each time. The problem with this is if you already have a lower credit score, the hard pull affects your credit. It will lower your score.
Do Not Apply For New Credit
There are some industries that will pull your credit multiple times. These will compound and impact your credit. This is why it’s suggested you are mindful of this, especially around the time you are looking to get a mortgage. The Consumer Financial Protection Bureau also sets time frames for how long these credit pulls can affect your credit score. Credit inquiries make up approximately 10% of your overall credit score.
How To Improve Credit Scores And Re-Establish Credit For Mortgage To Buy A House
Buying a home is most likely one of the largest purchases a person will make in their lifetime. Because credit scores are so important to receive financing, it makes sense to try to improve them. All the main lending agencies have their own minimum credit score requirements. Fannie Mae and Freddie Mac require at least a 620 credit score for any conventional loan program.
What Are The Credit Requirements For FHA Loans
HUD, the parent of The Federal Housing Authority, FHA, is the federal agency in charge of FHA loans and FHA lending requirements. HUD can accept scores as low as 500 FICO on FHA loans. However, if your credit scores are under 580 and down to 500 FICO, you must have a 10% down payment. FHA offers a low-down-payment option for all credit scores above 580.
You will then only be required a 3.5% down payment. Typically, there is no minimum credit score requirement for VA mortgage lending. However, the lending institution can set its own minimum credit score for borrowers. The minimum credit scores set by the individual mortgage lender are called lender overlays. Not all mortgage lenders have the same lending requirements on VA loans.
Rates and Fees are Affected by Credit Scores
Typically, the lower your credit score, the higher the interest rate and down payment will need to be. But there are other things that are looked at in order to see if a borrower will qualify for a loan. They look at your debt-to-income ratio, assets, and whether you have made timely payments. You must find a lender who has the best programs for those with lower scores. Millions of people have issues with their credit. Don’t be discouraged. There is a lender who is willing to work with you and get you into a home.