REPAIRING BAD CREDIT
Keep an eye on your credit score.
While credit score is just one factor that lenders look at in a mortgage application, it’s one of the more important ones.
Federal legislation restricts the level of mortgage debt you can carry if your credit score is below 680, and many lenders will simply refuse applications below 600. It’s important to know, however, that there are options for those with damaged credit when it comes to buying or refinancing a house.
This first option, if you don’t have time to try and improve your credit score, is to go to a private lender. Your broker will arrange the mortgage in a similar fashion to how they would with a standard lender, however there are some important differences. Private lenders, while willing to take larger risks in terms of credit scoring and some other factors, are very particular when it comes to the mortgaged property. It must be good, marketable real estate, and they will often require an appraisal to confirm this.
A private lender is also going to compensate for their increased risk by charging a fee to the borrower, as well as a higher interest rate than you might find at a bank. There is a high degree of variability here, making your broker even more valuable as they can help you find the right private lender with options tailored to what you need. Private mortgages are typically a short-term solution, with terms of one or two years, that will allow a borrower to re-habilitate bad credit by paying off debts and making their regular payments.
If you don’t need an immediate solution as far as a mortgage goes, you can repair your credit in other ways. There are several methods for doing this, but the most important is to make your regular payments. Many people are under the impression that if you make more than your regular payment in one month, the excess will carry over to the next and this is simply not true. Better to make the minimum payment each month than to pay extra and miss one. Once you’re sure you’re making all of your minimum payments, paying off as much as possible should be the next step. In terms of which to focus on first, tackling the debt with the highest interest rate will save you the most money, while lowering everything across the board is likely to be best for your credit score.
Another thing you can do to improve your credit score is to ask your creditors to raise your limits. Whether this is successful or not is going to depend heavily on your repayment history, but the lower your balances are in relation to your total available credit, the better it is for your score. Lastly, don’t go looking for new sources of credit, and don’t cancel your existing ones. Too many inquiries into your credit from places like car dealerships or credit card providers spread over time will bring your score down. Cancelling a card that you’ve had trouble paying won’t erase those missed payments from your report, and in fact it’s better to have those long running accounts than several new ones.
Overall, it’s better to know where your score is and know what you’re facing so that you can come up with a plan to improve it. If you’ve had trouble with your credit and are thinking of buying or refinancing soon, it’s a good idea to talk to your broker early so that they can help you come up with some concrete steps to achieve your goals, whether that’s obtaining a short term mortgage with a private lender or coming up with a debt repayment and credit improvement plan.
In an upcoming post, we’ll talk about what to do if you’ve had to declare bankruptcy.