It is not a good time to have bad credit when looking for a home loan. Many people that would have been approved a year ago are now being denied even if they seem to have everything in order.
Whether this is fair or not is irrelevant because the reasons are justified. Increased foreclosure rates, resulting from “loose” lending standards, have spoiled the dreams of many responsible home loan candidates as agencies are forced to adapt to a growing problem.
The current situation can be likened to what many universities have gone through the last few years because of too many students failing out.
Allow fewer qualifiers, tighten restrictions and force borderline applicants to prove themselves by improving their test scores or attending a community college.
Some of these “at risk” students followed a winding road towards graduation and beat the odds, while others did not.
If you have been denied a loan, don’t sweat it, get back to focusing on saving money and building your credit. It is not the end of the world, rather an opportunity to provide more fertile grounds for your future home to sit on: when the time is right.
The FICO score originated from software developed by Fair Isaac and Company, is usually one of the first things mortgage lenders will look into. You have three Fico scores, one for each of the 3 credit bureaus: Equifax, Experian, and TransUnion. Each score is based on information that credit bureau keeps on file about you.
Important things to know:
- Each credit report must contain at least one account which has been open for at least six months
- Each credit report needs to be updated in the last six months
- National average FICO score is 723
Key elements that comprise FICO credit score:
- Payment history in paying bills on time
- Amount of debt owed
- How long credit cards are owned
- How much new credit you apply for
The quickest way to improve your FICO score is to pay off high balances on a credit card. According to Craig Watts of Fair Isaac, this can raise a FICO score 60-70 points overnight.
Eliminating debt is vital to lenders approving a loan. Credit card history signifies financial responsibility because the amount borrowed or owed is up to the borrower. Compare that to other loans, where a company or institution determines a set loan amount, and it is easy to see why credit history signifies sound money management.
If you are charging a lot on your credit cards make sure payments are spread evenly through multiple cards. Spending more than 50% of your credit limit on a card can lower a score dramatically. Don’t spend too much on a single credit card, split it up, pay your bills on time and your score will be on the right track.
Old Credit Cards
The older a credit card the better. It would be foolish to close a credit card account that has been open for several years and has been managed well. Additionally, new lines of credit will usually lower a credit score. Opening new lines of credit is fine but not at the expense of positive credit history.
Credit Score is Always Evolving
Just because you had positive credit three years or even a month ago does not mean that is the case today. One major blemish or a few monetary hiccups can dramatically alter your score. Taking minimal withdrawals from an old line of credit with a healthy track record is the credit equivalent to cruise control.
If credit is established – maintain it. If you are building credit, exercise discipline and distribution methods and one day you too will one day hit the cruise control button; driving towards the dream home you’ve worked hard to earn.