Do I Need to Repair My Credit Before I Apply for a Mortgage?

Your credit score is one of the primary factors that determines your access to credit. Many lenders look at an applicant’s credit score to decide whether to grant a loan, and if so, how much to lend and how much interest to charge. This approach bars many potential homeowners from getting mortgages, and it’s something we at Loanatik fundamentally disagree with. At Loanatik, we look at you as an individual, not as a number. That means we take many factors into account when underwriting a mortgage, and therefore can extend offers to consumers with low and subprime credit scores.

The truth is, a higher score can get you a lower interest rate, but mortgage rates are so low right now that the annual percentage rates even subprime borrowers will pay for a Loanatik mortgage are very reasonable. In other words, you don’t have to postpone your dream of home ownership while trying to repair your credit score.

Having said that, it makes sense for all consumers to raise their credit scores, even if takes a while. In this article, I’ll explain how credit scores work, things you can do to improve yours, and the reasons you should avoid so-called “credit repair” businesses.

What Is A FICO Score?

The big daddy of credit scores is the FICO score, developed by Fair Isaac Co. We’ll deal mostly with FICO scores in this article, but you should know that some other brands, such as VantageScore, are also used.

FICO scores range for 300 to 850, and they summarize in a single number the information on the credit reports that the three major credit reporting agencies (Experian, TransUnion and Equifax) maintain on consumers. Your current financial condition and history of paying your bills all factor into the calculation of a FICO score. A generally agreed set of FICO score ranges is used by lenders and creditors to underwrite debt:

• 300-629: Bad credit, also called subprime credit
• 630-689: Fair credit
• 690-719: Good credit
• 720-850: Excellent credit

These interpretations aren’t cast in stone, and different lenders may evaluate your FICO score differently.

Banks will offer mortgages to folks with good or excellent credit. Unfortunately, that leaves out about 45 percent of the population. Mortgage lenders like Loanatik offer much more reasonable access to loans. In fact, Loanatik can provide mortgages to consumers with FICO scores as low as 550, which covers about 88 percent of the population. We can offer mortgage APRs as low as 8 percent to subprime borrowers.

Components of a FICO Score

There are four basic components that determine a FICO score:

1. Credit payment history (determines 35 percent of your score): Lenders are interested in knowing whether you generally pay your bills on time. Your payment history covers debts stemming from credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your credit score will suffer if you’ve undergone bankruptcies, lawsuits, foreclosures, wage attachments, liens or judgements. The negative impact of these events can linger for a decade, although your score can begin to recover within a couple of years. If you had late payments, your credit report will indicate how late they were, how much you owed, when they occurred and how many payments you missed. On the other hand, if you made your payments on time for the most part, your FICO score will benefit.
2. Amounts owed (30 percent): Your score is affected by how much you owe, both in total and for each account. An important factor for revolving accounts, such as credit cards and homeowner lines of credit, is how much of your available credit do you owe. When you use most of your available credit, you’re considered riskier because you have little wiggle room before you max out. A low utilization per account, in the area of 10 to 20 percent of the credit limit, will lift your credit score more than an unused account will. Your score will also reflect how many accounts have balances, and how much you still owe on installment loans as a percentage of the original loan amounts.
3. Credit mix (10 percent): Lender want to see if you can handle a range of different debts. Although not of prime importance, credit mix is useful when you don’t have a long credit history. The mix categories include credit cards, installment loans, mortgages, retail accounts and finance company accounts. You don’t need to have loans in each category, and shouldn’t open credit accounts you don’t need. FICO scores consider the number and types of accounts you have, both open and closed.
4. New credit (10 percent): FICO scores are partially based on how many new accounts you have, how many recent inquiries have been made for your credit report, how long since you opened a new account, and whether you have recovered from prior financial problems. It’s not good to open too many accounts within a short time, as it indicates you might be in financial distress.

Improving Your FICO Score

It’s not rocket surgery figuring out how to elevate your credit score, as most suggestions are just common sense. However, there are one or two tricks that can help accelerate your score improvement:

1. Pay your bills on time: A partial payment beats a missed one, but try not to borrow more than you can pay back each month.
2. Reduce the debt you owe: We understand that it’s tough to do, but it would be better to refrain from using credit cards until you get your debt down to manageable levels. Pay off the debt with the highest interest rates first. You might consolidate your credit card debt with a zero-interest balance transfer, in which you transfer your open balances to one credit card that doesn’t charge interest on the transferred amount for a period of time. Check out Chase Slate, it’s a leading card for this purpose.
3. Correct your credit report: Errors in your credit report might be needlessly depressing your credit score. Visit com to get free copies of all three of your credit reports. Go through them carefully and note any mistakes, discrepancies or unfair statements. Then contact the credit reporting agency and/or the creditor to dispute the errors or give your side of the argument. The law requires that the credit bureaus respond to you and include your comments in the reports.
4. Get a secured credit card: If you have a low score and can’t get a regular credit card, apply for a secured one. With this type of credit card, you set up a bank account and keep a minimum balance in it that will be used to pay your credit card debt if your payment is late. We know of cases where the credit card issuer reported the new card to the credit bureaus without disclosing it was secured, thereby immediately boosting a credit score by 60 points.
5. Become an authorized user: You can improve your credit score by having a creditworthy friend or relative name you as an authorized user on their card. As an authorized user, you can use the credit card to make purchases, while your credit report benefits from the positive actions taken by the primary owner.
6. Buy a home: Taking out a mortgage and then making timely monthly payments can really help establish you as a creditworthy individual. As we mentioned, you can get an affordable mortgage from Loanatik even if you have poor credit. The sooner you start making mortgage payments, the faster you’ll notice an improvement in your credit score.
7. Do it yourself: Don’t waste time with for-profit credit repair companies – many are useless or worse. You can do it yourself, but if want help, contact the Department of Housing and Urban Development for the name of a nearby approved credit counseling service.

It can take time to raise your credit score, buy Loanatik can get you a mortgage without the long wait. Contact us today!