Motivated by recent increases in property values, some borrowers are refinancing and may even be getting some cash out again. There are also buyers seeking to find new homes. The market is becoming more active, and that’s good news.
Though some are eager to move forward, the shaky housing market of recent years and the general state of the economy have left many with credit issues that need to be addressed.
Credit issues plague many homeowners and aspiring homeowners of all income levels, from low to high. Some may also be re-entering the home purchase market.
Benefits of resolving troubled credit
In many cases, credit is the difference between getting a lower interest rate or payment and having to wait — or not obtaining a loan at all.
Many who would love to buy now have low Fico scores or pesky collections, charge-offs or public records that hinder their progress.
Most banks want to see at least a 620-640 middle Fico score.
A Fico score, which ranges from 300 to 850, is the standard credit score in the United States, based on information from all three credit bureaus.
A 680 score is decent, above 720 is good and higher than 750 is excellent.
Fix credit inaccuracies
Bear in mind that there may be some inaccuracies in your credit report. Pull your free report with www.annualcreditreport.com.
Challenge what’s wrong by calling the phone numbers associated with the accounts or the credit company — or, if you’re in the midst of working with a loan officer, the officer will likely guide you with this process. A quarter of customers have some erroneous data on their credit report.
You may be able to pay down some balances to 30 percent of the limit, or pay them off completely.
But if you want to buy a home, avoid closing accounts. You generally need to have at least three trade lines. Banks want to see active trade lines that you’re paying monthly and on time — but not with high balances.
If you negotiate with your creditors, they may allow you to pay a lower amount than you owe, just to settle the account. Be aware, though, that this will likely reflect negatively on your credit — for example, "Borrower settled for less than the amount owed."
A better negotiation would be to ask whether the account, if it is paid partially or in full, can be removed from the credit report.
Deal with larger issues
Would-be home buyers must wait a minimum of three years after a foreclosure or short sale and one to two years after a bankruptcy, depending on the type and the circumstances.
You’ll probably be asked for all pertaining documentation, so keep that file handy.
Other relevant public records include tax liens and judgments that will likely need to be paid off. A tax lien may have an associated payment plan that a loan underwriter may accept.
Once you enter into the home-buying or refinancing conversation with a loan officer, if your Fico scores are too low or credit issues too great, you can devise a plan to move to where you need to be by paying off debt and so on.
Having no late payments in the past 12 months is essential to your Fico.
If you’re close to the Fico you need, Rapid Rescore may be an option. This allows documentation to be submitted for an accelerated Fico boost, credit correction or update. This can be costly, however.
Simple tips to boost Fico scores
In summary, keep balances at 30 percent of the loan limit or less.
Don’t have any late payments within 12 months — especially no mortgage lates.
Don’t have too many inquiries, meaning having your credit report pulled excessively.
When you’re shopping for a mortgage loan, a few pulls within a 60-day period shouldn’t hurt your score, unless you you’re checking credit for multiple other purposes.
Address collections, and negotiate to have them removed from your credit report, if possible.
Have some credit, keep it active and pay it on time.
These things will save you money and may help you finance a wonderful new home.
• Carla Carroll is a senior loan officer at Diversified Capital Funding in Tracy. She can be reached at 914-3753 or firstname.lastname@example.org.