Many homeowners were negatively impacted by the recession and the mortgage industry blow-up a few years ago. While some homeowners have managed to rebuild their financial picture in the last several years, some are still dogged by credit scores that prevent them from taking advantage of current low interest rates and improving housing markets.

Let me be clear. There are no “quick fixes”. There is no company that can erase accurate derogatory information, no matter how much you pay them. At best there are companies that can help you eliminate inaccurate information that may be weighing you down, but most of the techniques they use are not a mystery, and you can do them yourself without having to pay a 3rd party.

If you are one of the millions of Americans plagued by a low credit score, don’t despair. You CAN repair your credit, but it takes time and an absolute commitment to eliminating debt and paying your bills on time, sometimes for years.

Why is credit important?

A mortgage is a big investment…probably the biggest single investment you will make in your lifetime. The mortgage lender is taking a big risk lending sizable sums, and they must investigate to ensure that you are likely to pay the money back. A lot of missed payments, delinquent accounts, or charges offs are big red flags to how well you handle your finances. Mortgage lenders have become very risk averse since the mortgage melt-down, and they are very unwilling to risk getting burned again.

There is more to the credit story than just qualifying for the loan, though. According to Bankrate.com, even a very small difference in credit score can affect the interest rate you may qualify for. For instance, the difference between a score of 698 and 700 could result in a higher interest rate that costs you tens of thousands of dollars over the life of the loan. Obviously, it is in your best interest to improve your score as much as possible before applying for a mortgage.

So what can you do?

If your score is very high, say over 760, you really don’t need to do anything. Any increases in your score will likely not translate into a change in interest rates. If your score is below 600, qualifying for a mortgage would be very difficult. There are a few government programs that will allow lower scores in certain circumstances, but these programs may end up costing you more in the long run. You will want to investigate your options very thoroughly.

If your score is too low to qualify for a mortgage, then there are some steps you need to take immediately:

  • Review your credit report regularly and thoroughly.
  • Dispute inaccurate information. This could include old delinquencies that should have fallen off, accounts still showing a balance that were paid in full, or reported delinquencies that were not delinquent.
  • Bring all delinquent accounts current.
  • Make a commitment to making payments on time EVERY MONTH, going forward.
  • Pay down excessive debt. There are several approaches to this: you can pay off the low balances first, to give you the early successes and confidence to keep going (Dave Ramsey’s “debt snowball” plan). You can pay off the highest interest rate debt first. Or you can follow Suze Orman’s action plan. There are others. Research what works for you.

It may take several months or years, diligently following your plan, to raise your score enough to purchase a home. But it’s a worthwhile endeavor and will help you improve your financial outlook in all areas of your life.

What if I just need to raise my score a few percentage points?

If you can qualify for a mortgage, but want improve your interest rate prospects by increasing your score, there some simple steps you can take. These aren’t guaranteed, since every situation is different, but you could see a bit of lift in your score.

  • Dispute inaccurate info and make sure it gets removed.
  • Spread credit card debt over numerous cards. If you have one high-balance card, and several with zero balances, this could actually hurt your score. According to BankRate.com, you should shoot for your balances to be 20-30% of the credit limit.
  • Pay off as much debt as you can. But don’t close the accounts. Your open credit lines factor into your credit worthiness.
  • Avoid opening new lines of credit if it’s not needed.

Following these steps should net you a few extra points on your credit score.

We at the Pierson Home Sales Team are committed to helping our clients successfully market or buy their dream home. As always, we stand ready to serve all your real estate needs. When it comes to buying or selling your home, we are here to help answer any questions and guide you through a better understanding. Please do not hesitate to contact us at info@piersonrealestate.com or phone us at 202.800.0800.

Tags: Tim Pierson, Northern Virginia, Home Buying, Mortgage Financing, Credit Repair, Real Estate