If you’re thinking about buying a home, now is a great time to do so. Economists and real estate experts expect interest rates will rise 1 to 1.25 basis points by the end of the year, as will inflation. In addition, the real estate market, while in full recovery, still has affordable prices.
The problem for ten of million of people is the damage done by the Great Recession. If you have a few dings on your credit report, you certainly are not alone. Banks are relaxing their mortgage requirements a bit, partly due to the fact they are trying recover some of their own losses. What’s more, people are getting a mortgage with less than 20 percent down.
However, the better your credit score, the lower interest rate you’ll pay and if you do put down 20 percent, you might be able to lower your monthly payment if you don’t have to pay PMI or private mortgage insurance. Addressing any problems with your credit file, is key to paying less.
UNDERSTANDING YOUR CREDIT FILE
Most people know their credit score is based on how they pay the credit card bills, car payments, and student loans. What a lot of consumers don’t know is there are more factors. A FICO Score consists of five categories: 35 percent is based on payment history, 30 percent on amounts owed, 15 percent length of credit history, and 10 percent for both types of credit and new credit accounts.
“One credit repair clinic tactic is to challenge every item in a credit file — negative, positive, or neutral — with the hope of overwhelming the credit bureau into removing information without verifying it. However, credit bureaus often dismiss these challenges on the ground that they are frivolous, a right that credit bureaus have under the Fair Credit Reporting Act. You are better off getting your file and selectively challenging the items that are incomplete or inaccurate.” —Nolo.com
In addition to these things, there are other factors which go into a credit, a secondary tier or “alternative credit”, which are things such as paying utilities and insurance. Basically, everything is recorded in one way or another and it’s not just your DTI or debt to income ratio which matters.
What you’ll want to achieve is getting a score of 760 or higher. This won’t happen overnight, but the good news is you can do it yourself.
CLEANING UP YOUR CREDIT FILE TO GET A MORTGAGE
Do yourself a huge favor and skip the credit repair clinics and services, they’ll just charge you for what you can do on your own. What’s more, these services are under heavy scrutiny of the Federal Trade Commission because more than a few have taken advantage of consumers.
Here’s what you need to do to get your credit file in shape before applying for a mortgage:
- Get copies of your credit reports. There are three credit reporting agencies: Transunion, Equifax, and Experian. By federal law, you are entitled to one free copy per year, just go to AnnualCreditReport.com and fill out the form.
- Review each one thoroughly. Don’t just look over the entries, pursue every item because there’s bound to be inaccuracies, especially if you share the same name as your father or mother. Don’t be surprised to find entries which should go under your parent’s name.
- File disputes immediately. Dispute every single inaccuracy but make clear distinctions so the bureaus know what you are challenging. By law, the credit reporting agencies must review and verify all disputes or remove them.
- Pay off delinquent accounts. Be it late accounts, charge-offs, collections, or judgments, those things aren’t going away anytime soon. They remain on file for seven years after the date of last activity. So any activity restarts the clock and it’s better to have them paid and marked as paid then try to wait them out.
- Reduce your DTI. This is the percentage of debt compared to your gross monthly income and it should be under 35 percent. Basically the lower the better, so try and offload as much debt as you can.
- Don’t incur any new debt. Once you pay things off, don’t make the mistake of adding new debt because it will hurt your chances of qualifying for a mortgage.
- Check your score. Wait at least 60 days after the dust settles before you check your FICO credit score
When you’re ready to buy a home here in Sarasota, be it a single family home, townhouse, or condo, and want to find the perfect property for you and your lifestyle, then give me a call. I’ll be happy to speak with you about what type of home you are looking for and assist you in finding one that has your must-have features. I’ve guided many people through the home search, purchase offer and acceptance process and will be glad to lend you the same assistance.