There are three major consumer reporting agencies (CRAs), or credit bureaus, that mortgage companies use to assess a buyer’s credit rating: Experian, Equifax, and Trans Union. Credit scores typically range from 300 to 850. For home loan purposes, a score of 650 or higher indicates a good credit history and will make it easy for you to secure a mortgage. If your score falls between 620 and 650, your borrowing capacity will be examined more closely. And if you rate below 620, you may have a credit crisis.
When you’re in the market to buy a home and discover that you have bad credit and your score is low, don’t despair. Although it may delay the purchase of your home, there are ways to repair your bad credit rating so that you can still qualify for a home mortgage with a decent interest rate.
To evaluate your credit rating, you’ll need to obtain copies of your credit reports from the various agencies. Examine them carefully to see what transactions are lowering your score.
Special note about bankruptcies: A bankruptcy can lower your credit score by 200 points or more. Repairing bad credit following a bankruptcy is beyond the scope of this article.
Charge-Offs: Charge-offs appear on your credit report if a creditor has given up trying to collect from you and ends up writing off the amount you owe as a bad debt. Charge-offs are one of the main reasons why loan applicants are denied credit.
How to Repair It: If you have any charge-offs, contact those creditors immediately and make arrangements to pay off the old debt. After a few months of regular payments, or if you repay a charge-off debt in full, submit a written request to that creditor to change the status of your credit reports.
Late Payments: Late payments are handled slightly different depending on whether they are isolated incidents or recurring problems.
How to Repair It: If you have a single late payment here or there listed on your credit report, the best thing to do is contact your creditors by phone to discuss the situation. Follow the conversation with a written request to have the isolated late payments removed from your reports. If you’re consistently late with payments, however, repairing the problem is a little more involved. You’ll need to begin by setting a pattern of paying on time over several months. Once this positive pattern is established, call your creditors (and follow-up in writing) and let them know that you’re back on track. With persistence and patience, you may be able to delete these score-lowering marks.
Reporting Mistakes: Sometimes, creditors just make mistakes when reporting to the bureaus. Other mistakes might include charge disputes that resulted in an initial late payment that was eventually reversed. Unfortunately, it’s the individual’s responsibility to spot – and repair – reporting mistakes that lead to bad credit.
How to Repair It: Once again, contact your creditor by phone and follow up with a written request that the mistake is corrected. Because the Fair Credit Reporting Act (FCRA) requires that credit agencies and their information providers investigate reports of inaccuracies, you’ll also want to contact the CRA directly to report the discrepancy.
As you work on repairing your credit rating, there are other things you can do to improve your score:
• Make sure that you pay all of your monthly bills on time
• Avoid opening new credit card accounts, including department store cards.
• Work toward paying down your unsecured debt, but keep accounts open even if you pay them off
• Pay cash for the things you need instead of charging them.
If, after all your work, you still score below the 620 marks, it doesn’t mean that you won’t qualify for a home loan. It may mean, however, that your mortgage will take longer to process and the terms and interest rate may not be as good as you were hoping for. Talk to your real estate agent about referrals to high-risk lenders.
Repairing bad credit can take many months to a year or more. But when you’re ready to buy a home, you’ll be glad you took the time to improve your score – and your mortgage payment will be lower because of your efforts.