The Document Chronicles - What Mortgage Lenders Need and Why They Need It
October 21, 2015
Tax Filing Season and Mortgages: What You Need to Know
February 5, 2015
What Story Will Your Credit History Tell?
March 2, 2016
Clearing Credit Challenges When Buying a Home
March 17, 2015
We all make mistakes. When it's a financial error or misjudgment, often it's your credit score that suffers. Borrowers may have the income and the savings to buy a home, but face challenges due to low credit scores. Other borrowers have good credit, but too many debt obligations.
Here are some tips on how to quickly and correctly overcome some of these challenges in order to purchase the home of your dreams.
Wait it out
This is usually not the most popular option, so let's get it out of the way. The bad news? Paying off a derogatory debt like a medical collection or judgment will usually not affect your credit score at all. The good news? Paying your other accounts on time for the next 6 to 8 months after paying off derogatory items will help improve your credit score. So, if you're in a position to wait or have not yet started looking for a home, getting your credit report pulled before you start is a great way to know where you stand, and what you need to do. A good target score to aim for is 700, but 680 will qualify most borrowers for many loan programs.
Pay Down Debt
One of the main factors that can negatively impact your credit score is having your credit card balances eating up more than 30 percent of your available credit. If you have a credit card with a $10,000 limit and are carrying more than a $3,000 balance, you're hurting your credit score. Try to get all of your active credit cards paid off, or at least paid down below the 30 percent threshold, if you need to boost your score. In some cases, this can increase your score by 30 points or more.
Part of your credit profile is your debt-to-income ratio, which is your monthly debt obligations versus your monthly income. If your credit score is at least a 620, but your debt-to-income ratio is too high, you may look into having a non-occupant co-borrower on your mortgage loan. This is basically a co-signor for your mortgage. They don't have to live in the house, but usually have to be on title and, of course, on the mortgage. Typically the non-occupant borrower must be a relative whose income, assets, credit and most importantly, debt-to-income ratio, will pass all underwriting criteria with flying colors.
It's important to note that if you are working with a mortgage loan officer you will want to review your options first before tackling your credit score since there are certain actions that may hurt, more than help, your credit.