Mortgage Articles – For the smart consumer

Cleaning Up Your Credit Report
When you begin to consider whether now is the right time to buy a new home, you should pay close attention to your credit report.  Every lender will want to pull a copy of your credit report in order to verify your debt-to-income ratio and check your credit score.  These two pieces of information are critical for the lender, who needs to determine your creditworthiness and your ability to repay a mortgage loan.

Your interest rate and the amount that you are able to finance will be determined by the information that is reported by the three major credit bureaus.  Keep in mind that having less-than-perfect credit does not mean that you will not be able to get a mortgage loan. It does mean that you will probably get a sub-prime rate and will be offered a lower approval rate than that offered to better-qualified borrowers.  It really depends on what types of credit accounts you have had in the past and how much you now pay each month.

Having any or all of the following items listed on your credit report will significantly impact the lender’s evaluation of your borrowing potential:

  • A bankruptcy fewer than 10 years ago

  • Unpaid outstanding debts

  • Credit cards balances that are near or exceed the available limit

  • Many late payments

  • Liens or judgments that are unpaid or unresolved

You probably already know if one or more of these items appears on your credit report. However, be aware that three different credit bureaus track your information. It would be wise to know how each agency is reporting your information to potential creditors.  The three major credit reporting agencies are Equifax, TransUnion, and Experian.

Some creditors report to only one of these agencies, while others report to all three.  Likewise, some lenders request information from only one of these agencies, while others request information from all three.  There is no way to determine ahead of time what impact your financial behavior will have on your ability to get credit in the future.

If you are unfamiliar with your credit reports, request a copy from each of the three major credit bureaus.  Depending on your situation, you may be able to get these copies for free.  In addition, many websites provide you with immediate access to your credit report and score.  Be sure to work with a reputable source if you decide to view this information online.

Here Are Some Things You Can Do To Clean Up Your Credit Report

  1. Make your payments on time: Late payments are the easiest type of credit blemish to avoid.  Keep accurate details on each of your accounts, including when payments are due.  Some creditors offer grace periods, but others do not.  You need to ensure that you are paying on time every month.

  2. Dispute errors: If you see an error on your credit report, you have the right to dispute the item through the credit bureaus. You will need to write a letter to the credit bureau to request an investigation.  The bureau then has 30 days to verify the information. If the creditor fails to respond, then the item must be removed immediately from your credit report.

     If you have tarnished credit, your lender might ask you to close an account or two.  Although this does not improve your credit score, it will reduce your potential for incurring additional debt.  Mortgage lenders sometimes make this request before granting final loan approval.

    Sometimes consumers are also urged to contact the creditor reporting the disputed item In some cases it is best to contact both the reporting agency and the creditor. Remember that a dispute that is not addressed will result in negative information being removed from your credit report.

  3. Monitor time limits: Negative information can be shown in your credit report for only seven years.  However, some creditors work around this by reporting late payments or other problems several years after they occurred. In this way, a ten-year-old debt might appear to be a two-year-old debt. If you notice this happening on your credit report, contact the credit reporting agency and explain the situation.  The negative information must then be removed from your report(s).

  4. Make personal statements: As a consumer, you are permitted to make personal statements on your credit report, either in general or for individual items.  These statements may help potential creditors understand the circumstances surrounding late payments and other credit blemishes.

  5. Pay any old debts: If you have outstanding unpaid items on your credit report, make every effort to pay the creditor as soon as possible. Those payments may be reported as being late, but at least the accounts will no longer be marked as unpaid on your credit report.

  6. Get a major credit card: If you want to rebuild damaged credit, you need to have a major credit card. Unfortunately, it can be nearly impossible to get a major credit card if you have damaged credit.  Investigate your options carefully in order to protect your consumer rights, and consider getting a secured card if necessary.

  7. Be patient: If necessary, wait to apply for additional credit until the negative items on your credit report have expired.  You can verify that the information has been promptly removed by checking your report again.

  8. Avoid unnecessary applications for credit: Having many inquiries into your credit history is viewed as a negative sign by creditors.  Therefore, allow your credit report to be accessed only when it is absolutely necessary. For example, avoid applying for a large number of credit cards.

  9. Pay down your loans whenever possible: If you have a car loan, student loans, or any other type of loan, try to pay down the balance as much as you possibly can.  This is a crucial factor for many lenders, who base their lending decision partially on your debt-to-income ratio.

Most consumer advocates recommend staying away from debt consolidation services (not consolidation loans) and opening only necessary credit accounts.  In general, the more credit accounts you have open, the riskier you seem to be in the eyes of a potential mortgage lender.

If you have tarnished credit, your lender might ask you to close an account or two.  Although this does not improve your credit score, it will reduce your potential for incurring additional debt.  Mortgage lenders sometimes make this request before granting final loan approval.

In most cases, lenders are willing to work with people who are trying to clean up their credit reports.  Very few people are beyond help in improving their credit score and reports.  If you are vigilant and aware of how lenders view you on paper, then you are a well-educated consumer who cares about financial appearances. This can make a world of difference to lenders and can help you get the mortgage you need to buy the home that you want.

You will not be penalized for requesting copies of your own credit report or credit score.  Therefore, take advantage of the free annual credit report that is available to every consumer and start taking control of your financial situation and future today.