The time to repair your credit for buying a home is well before you even apply for a mortgage. This is especially true if your credit report reveals multiple credit problems. It’s not always possible to get credit issues fixed quickly, and if you have more than a few, the task is that much more time consuming.
If you have any idea that you will be applying for a mortgage in the near future, you should sit down with a mortgage lender to get prequalified, and have your credit report run. That will give you plenty of time in advance to repair any credit issues that show up on your report.
Here’s why you need to do exactly that…
The Best Rates Go to Those With the Best Credit Scores
Mortgage lenders provide interest rates based on what is known as “tiered pricing”. Several factors make up the tiers, including loan amount, loan-to-value ratio, property type and occupancy, and of course, your credit score.
The higher your credit score is, the lower the interest rate you pay. Conversely, the lower your credit score is, the higher the rate you will pay. It is even possible that your loan application will be declined entirely if your credit score is below a certain level, which is generally 620, though certain loan types may have even higher credit score requirements.
If you want to ensure your approval, as well as having access to the lowest rates, you’ll need to make sure that your credit is as clean as possible. It is always best to take care of that during the pre-qualifying phase, before you make formal application for a mortgage, and especially before you put in a written offer to purchase a home.
It May Take Longer than You Think to Work Out Credit Problems – the Sellers May Not Wait
The entire reason why you want to perform any necessary credit repairs in advance of making an offer on a property is because the process may take longer than you think. Property sellers generally want to close on the sale within 30 to 45 days. If you are busy repairing credit problems, it’s very likely that you won’t make the sellers closing deadline. At that point, the seller may decide to sell the property to a more qualified purchaser. Do you really want to miss out on your dream house because you failed to take this step? I don’t think so.
A single credit issue can easily take 30 days to resolve. Sometimes it requires use of an attorney in order to get an uncooperative creditor to even work with you. That can make the process little bit longer, since you are now using an intermediary.
It should go without saying that if your credit score is below the minimum lender requirements, and you have several creditors in need of repair, the process can take much longer. If you’re serious about buying a home, you will have to make sure that you have plenty of time to repair your credit in advance – whatever that will take.
There Are No Subprime Mortgages Anymore
There used to be a Plan B for homebuyers with bad credit, at least up until the Financial Meltdown hit a few years back. If a homeowner did not qualify for a traditional mortgage due to credit problems, he or she could always apply for a subprime mortgage. These were loans that required a higher down payment, and came with higher rates, but they enabled people with poor credit histories to purchase a home, without having to first repair their credit.
But subprime mortgages no longer exist. Meanwhile, credit underwriting has gotten even tighter on traditional mortgages. Lenders today are looking for something close to perfect credit in order to grant a mortgage.
If you have serious credit problems, the only way to get a mortgage these days is to repair your credit first. Don’t imagine there’s a magic mortgage loan out there that will enable you to get a mortgage with fair or poor credit.
You May Need Credit After You Close on Your New Home
Though getting an approval for a mortgage is viewed as the primary purpose of having good credit, most homebuyers find that they will need access to additional credit even after closing on the home.
After all, once you have the home, you will need furniture for it, and there may be repairs and upgrades required. It is also very typical that people need to purchase a new car shortly after closing on the home. That’s because many people delay replacing their car as they focus on putting the down payment for the home together. Once they buy their home, they have no choice but to deal with their transportation.
Getting a Mortgage Won’t Necessarily Fix Your Credit – If You Even Can
It’s sometimes thought that getting a mortgage can work wonders in improving your credit profile. There’s actually some truth to that – generally speaking, a mortgage represents the most significant credit entry on the average person’s credit report. A perfect mortgage history can improve your score, but even one or two late payments can sink it in a heartbeat.
But this is why it’s important that you repair your credit before buying a home. Making a monthly mortgage payment requires financial discipline. If you don’t have it before purchasing the home, you’re unlikely to develop it once you do.
Part of this owes to the fact that a mortgage payment is usually higher than what the homeowner previously paid for rent. But equally significant is the fact that homeownership brings about a sequence of expenses that a renter doesn’t have. This can include routine maintenance, such as landscaping and snow removal, as well as replacement of major components of the home, such as the furnace and the roof.
Each of these expenses increase the cost of home ownership, and requires even better money management than you might have had as a renter. I’m not pointing this out to rain on your parade. I’m just mentioning the importance of dealing with your entire financial picture when you embark on a home purchase. This way, you can fix your credit, buy your home and keep it Pilgrim.
Repair your credit for the purchase of a home, and then create good money habits that you can carry forward into your life as a homeowner.
If you need help with increasing your credit, there are some good service providers that do exactly that.