If you are planning to buy a house or refinance the one you own, your credit score is of paramount importance and it is in your very best interest to know what your score is and to take whatever action you can to be sure it is as high as possible. If your credit score is below 600, getting a mortgage with bad credit will much easier if you follow the steps below.
Before you apply you need to put together a plan to get yourself into the best possible financial position in order to get the best possible rates for your new mortgage. Bad credit mortgages are available however your credit score will directly effect how expensive your mortgage will be.
FICO Scores
When you apply for a mortgage your lender will make an inquiry to the three credit reporting agencies, Experian, Tran Union, and Equifax. Your mortgage lender will take the middle score or take an average of the three to underwrite your loan. It is a good idea to know what these scores are before you begin the loan process. If there is a problem it is best that you find it first and take the necessary steps to have it resolved before your mortgage lender puts your package together.
Looking At Your Scores
Equifax has your “real” credit score. The scores held by Trans Union and Experian are calculated using a proprietary process and will be different than Equifax. Only Equifax applies the FICO model to its data and therefore the other two agencies may have different data as well as mistakes. Lenders require reliable data and will use all three scores regardless. It is best to get all three of these reports and clean up mistakes and calculate an average in order to have a realistic view of what your lender will be using to determine your interest rate.
Revolving Balances
Revolving balances such as those created by credit cards are said to be necessary in order to show responsibility with debt. Many people believe that if they have kept up their payments, regardless of their balance, it will have a positive effect on their credit score. This is not necessarily true. Maintaining a balance that is too large can reduce your score considerably as it increases your debt to income ratio.
Your plan should include a rigorous effort to lower your overall revolving balances. The FICO model will place your revolving credit into one of five levels. These levels are determined by what percentage of your available credit you have used and are making payments on. These levels are 20%, 40%, 60%, 805, and 100% of your available credit. The lower the level you are on the higher your score will be. Therefore you should try to get this level down to 20%.
Examining Your Credit Reports
When examining your three credit reports you need to look at every entry very closely. Don’t assume for a minute that because it is in writing on your report it is accurate. Cross reference each record with your personal records such as monthly statements. I have heard of cases where information in the report is that of someone’s child who happens to have the same name, or information that is many years old and out of date. There have even been reports of data that just appears out of nowhere for no reason or perhaps because of an incident of identity theft.
Repairing and Removing Negative Data
Be aware that information that is over seven years old can and should be removed. You may also find duplicate data entries, both contributing to your overall score even though one is just a copy of the other. When a collection is ordered the reporting period begins when the first missed or late payment was due. Many times a collector will “reset” the clock either by accident or for some other reason causing the issue to continue being reported beyond its seven year limitation. Also, when a collector sells your case or returns it to the original lender, reporting should stop however this step is often overlooked.
Verifying Positive Data
Sometimes even the positive data can be missing or wrong which can also lower your overall credit score. Make sure that your credit limits are correct as well as the dates on which you opened your account. If your credit limit is listed as lower than it really is this it will increase your revolving credit percentage level. If the date you opened your account is recorded as later than when it was really opened it will look like the account is new and this too will lower your overall score.
A Few Tips
While repairing your credit for your loan whether it is a bad credit mortgage refinance or a new subprime mortgage, you do not want to make any large purchases before applying. This increases your revolving credit level and lowers your score. Wait until you are done with the mortgage loan before spending large amounts of money. Even if you have just come into an inheritance, you need to be mindful that the credit agencies will not be aware of you new found wealth and may see the large expenditures as frivolous behavior.
Mortgage brokers have a tool that you can use called a rapid rescore. With this tool you can show documentation regarding dates, credit limits, and balances, as well as proving negative data are erroneous or out of date. Your mortgage lender will then submit this new information to the credit agencies after which they are required to recalculate your score in three days. This service is not free however, the small fee may well be worth a lot of money in terms of the interest you will be eligible for with a higher credit score.
Your New Credit Score
In order to maintain a great credit score you do need to have a revolving balance. Yes, your score is determined by how much you owe in relation to how much you can potentially borrow however, having no history of balances being paid off on a regular basis can be seen as a lack of experience in managing debt. Therefore, after your credit is repaired you will also need to build positive entries in order to make your score the best it can be. This should be done as soon as possible because when new accounts are opened your score will fall for a spell until you have created a history of timely payment.
Getting a mortgage with bad credit is easy, however, getting the best deal possible by taking precautions and making the effort to get your credit score as high as possible is a bit more difficult and time consuming. The bottom line though is that your efforts will save you money.
Tags: bad credit mortgages, credit reports, credit score, FICO model, mortgage lenders, rapid rescore