If you have credit problems, you can make improvements before applying for a loan. Even if your history includes a bankruptcy or foreclosure, following these tips can improve your credit record enough to help you qualify for a future loan:
- If you've made late payments in the past, take six months to a year and make every payment on time before applying for a loan.
- Use cash whenever possible, and stop using credit cards.
- Use secure savings to pay down high debts vs. saving for a down payment that may never happen.
- Lower the balances on all credit cards. Start with the highest interest accounts first. As they're paid off, write to each company canceling your account until just one or two remain. Just paying off the balance does not close the account. Keep copies of any letters requesting closure of the account.
- Pay down installment loans such as car payments.
- Don't open any new credit accounts. Even accounts that allow up to a year to pay with no interest will count in your credit scores and debt ratios.
- If you've had a good credit history for seven years (the period used for scoring), but it was damaged by extenuating circumstances, write a 100-word explanation to file with your loan application.
- For serious credit problems, ask a credit counseling center about signing up for a home buyer's payoff program and apply for a loan only when you're nearing the end of the program.
Still turned down?
If your lender turns down your application because of poor credit, ask for precise reasons. You are also entitled to a copy of your Residential Mortgage Credit Report. If it contains errors, be sure the dates of any accounts in question are within the past seven years; anything older shouldn't be used to assess your credit risk. Advise your lender of any errors immediately. You should contact the relevant agency or agencies listed below to request a new investigation of any accounts in question. Any new investigation must be initiated by you, the consumer. Be sure that credit accounts you've closed are noted as "closed by consumer." (Note: Closing an inactive account will not remove its history from your record.) Finally, ask your lender if you're a good candidate for "rapid rescoring". This may involve a local credit-reporting agency which will review your report for inaccuracies and give you specific advice to potentially raise your score in a matter of days.
If you're turned down for a conventional loan because of credit problems, you may be able to qualify for a loan from a "subprime lender". These lenders work with people who have a B or C credit rating. You should be prepared for a substantially higher interest rate. Be extremely cautious with "special" loans offered to high-risk first-time buyers—they often demand impossibly high interest rates or promise future refinances that never happen. They may also contain a pre-payment penalty clause which means if you refinance your loan or pay it off within a specified period of time you will be charged a penalty fee which could be substantial.
Even with a great credit history, remember to review your credit report annually or before making major purchases. Below are the three credit bureaus that provide credit scoring to lenders:
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Fast Facts & Tips
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Loan Origination Fee is a fee charged by a lender to cover administrative costs of processing a loan. |
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