Credit Repair for Mortgage Approval
Finding the perfect home is still the American dream, but finding someone willing to lend you the money for it, is a growing nightmare.
There were 12.9 million home loan applications in 2018 and 7.7 million resulted in mortgage approvals. That means 5.2 million applications were denied, which was an increase of 924,000 denials over 2017.
In many cases, the disapproval was because consumers didn’t check their credit score before they went searching for home. The housing collapse of 2008 is still fresh enough to make lenders cautious with their money and wary of people with poor credit.
If you want to know what kept you locked out, ask the bank credit union or online lender where you applied. If their reply includes negative remarks about your credit score, don’t give up! Rebuilding your credit score is something you can make happen.
There is no fast way to rebuild credit. It will take time and self-sacrifice, but as your score rises, so too does your ability to borrow money on friendly terms. Nearly everyone can improve their credit if you face the challenge and have a plan.
Repairing Your Credit Score
If your goal is to repair your credit so you can get approved for a mortgage, you need to start with the basics.
Only buy what you can afford. If there isn’t enough money in your bank account to pay for an item – we’re talking anything from a new dress to a new refrigerator – don’t buy it! You can’t get ahead by falling further behind.
Pay your bills on time. This makes up 35% of your score, meaning it carries the most weight. You build a positive credit history by paying the entire amount due at the end of every month, or at least making a minimum payment. The key part is paying on time. Late payments, liens, foreclosures and bankruptcies are anchors on your score, dragging it down for 7-10 years.
Ask for a higher credit limit. This is a relatively easy and effective way to improve your score. If you pay on time over a 6-12 month period, call and ask card companies to raise the limit on your credit cards. That helps with the credit utilization factor – the percentage of available credit you use each month – that makes up 30% of your score. Keep in mind that raising your credit limit does not mean you have more room for spending.
Check your credit reports and dispute errors. The reporting agencies are dealing with more than 200 million reports and one in five of them have an error. The errors range from incorrect reporting status to fraudulent charges that result from identity theft. If you’re one of the 40 million with an error, it could cost you from 10 to as many as 100 points.
Here are several other strategies to consider for raising your credit score:
- Become an authorized user on someone else’s credit card. Typically, a family member or close friend might add you to their account. Make sure the account has been open for a few years without late payments. Once you are on the account, its history will become part of your credit report. That could boost your credit score as much as 30 points.
- Build a credit history if you don’t have one. If you lack a credit history, it’s hard to make the case that you are a good risk. If you don’t have a credit card, get one. You can also apply for a secured lump-sum loan, sometimes called a credit-builder loan, and repay it on schedule. Demonstrating you can manage borrowed money is something lenders focus on.
- Keep accounts open. It’s better to keep a credit card unused in a strong box than close the account, even though you don’t plan to use it. Closing accounts can actually hurt your credit score in the short run.
The lower your credit score, the higher you mortgage interest rate will be, assuming you qualify for a mortgage at all. Those low fixed-rate mortgages you see advertised are reserved for applicants with high credit scores and aren’t available to you if your score is less than stellar.
Understanding the Mortgage Approval Process
Mortgage lenders use check lists to determine if you qualify for a loan. If you have defaulted on a mortgage in the last seven years, that can scuttle your application. Even being more than 30 days late on a loan payment in the past year can be disqualifying. Knowing the rules in advance can save you grief.
Debt-to-income ratio is another key factor used in reviewing loan applications. Simply, debt is the sum you have to pay each month on borrowed money – cars, mortgages, minimum credit cards payments, personal loans, etc. Income is all the money coming in from salaries, rental property, investments, child support and any other regular sources.
Lenders look at two forms of debt-to-income-ratios. One, called the housing ratio, also called the front-end ratio, is the percentage of your income that goes to housing expense. Those expenses include mortgage payments, taxes, home insurance, association dues, etc. That ratio typically shouldn’t exceed 28%, but can be as high as 31%. The other, called the back-end ratio, is the overall debt-to-income ratio, which compares all debt payments to all income. Lenders consider under 35% ideal, but sometimes will allow ratios as high as 45%.
Those limits apply to conventional mortgage loans. The Federal Housing Administration (FHA) offers mortgages somewhat laxer requirements.
What if you think you’ve done everything right and your mortgage loan application is rejected anyway?
You are entitled to an explanation from the mortgage lender under the federal Equal Credit Opportunity Act. The law prohibits lenders from denying you credit if you qualify.
If a lender turns down your loan, it must give you a letter explaining why you were rejected. You know your credit history and your credit score before applying for the loan. If the lender’s explanation doesn’t jive with that information, you have the basis for a complaint.
You can receive more personalized information about improving your credit score during a free credit counseling session with InCharge Debt Solutions.
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N.A. (2019, August 30) FFIEC Announces Availability of 2018 Data on Mortgage Lending. Retrieved from https://www.consumerfinance.gov/about-us/newsroom/ffiec-announces-availability-2018-data-mortgage-lending/
N.A. (ND) How to repair your credit and improve your FICO Scores. Retrieved from https://www.myfico.com/credit-education/improve-your-credit-score
N.A. (ND) What to Do If You’re Denied a Mortgage Loan. Retrieved from: https://thelendersnetwork.com/mortgage-denied-what-to-do/
N.A. (ND) What Protections Do I Have Against Credit Discrimination? Retrieved from: https://www.consumerfinance.gov/fair-lending/
Burge, M. (2016, Oct. 8). How your credit score affects your mortgage rate. Retrieved from http://www.latimes.com/business/la-fi-credit-scores-20161009-snap-story.html