Tips for Improving Past Credit Errors before Pre-Approval
Many people who are shopping for a home start with researching what homes are available in their area. While this is a great first step, at Union Home Mortgage Corp. (UHM) many of our loan officers will advise buyers to start the home buying process by applying for pre-approval for a home loan. Pre-approval is a prudent first step since it can help you set your budget, before looking. After all, it’s never fun to fall in love with a home and find out that it’s not within your budget. Instead, many lending professionals will suggest buyers start with pre-approval, and then refer back to their personal finances to see what monthly payment they’re comfortable with before deciding on a budget.
At UHM, we work with a variety of individuals with different backgrounds, incomes, home buying needs, and life circumstances. While we understand the regret that comes with past mistakes, there are some conditions that haunt borrowers (and their credit) for years. Getting pre-approved for a home loan can be hard for everyone and can be especially challenging for those with a tainted credit history. If you’re shopping for a home or considering pre-approval with a low credit score, past bankruptcy, or foreclosure following you around, it may feel like you’re navigating through quicksand while you try to traverse your way to the right home for your needs. We understand that these conditions can feel daunting, but there are some actions you can take as a borrower to not only better your credit but also help move you closer to the home you want.
Low Credit Score
Whether you’re shopping for a home, buying a car, or opening a new line of credit, a low credit score can hinder many potential purchases. While gaining advice that’s specific to your needs from a knowledgeable loan officer is an ideal first step, you can also try a few of these tips to increase a low credit score.
- Be patient: If you are considering getting pre-approved for a home loan and realized your credit standing isn’t ideal, you should take the time to reflect on where things went wrong. Once you hone in on the cause of your low score, it’s best to be patient with yourself and take the time to correct the low score by establishing positive borrowing patterns.
- Check for mistakes: Errors can sometimes occur when putting together a credit report. While reviewing your report, if you notice any erroneous mistakes, there’s no harm in challenging them. Correcting any errors that have been following you around for some time may have immediate results and increase your overall credit score.
- Be punctual: We were all taught that it’s imperative to pay our bills on time. When you’re late for a payment, this reflects negatively on your credit report. To stay on track, try to set up automatic bill-pay with your bank or keep a detailed calendar.
- Put more money down: If you’re in a hurry to get a new home and don’t have the luxury of time to increase your credit score, you could consider offering to put more down on a house. This will lower the risk on the lender’s behalf since it allows you to put more equity into the home and decreases the amount of the loan. However, this option only applies if you have excess cash reserves for a larger down payment.
Whether you filed for Chapter 13 or Chapter 7 Bankruptcy, there will be mandatory waiting times before you can qualify for a home loan. While every lender is different, the restrictions on those who have claimed Chapter 13 Bankruptcy are often less stringent. This is because those who qualify for Chapter 13 Bankruptcy still have some disposable income, while those who qualify for Chapter 7 Bankruptcy have proven that they have little or no disposable income to pay back their debts.
While it’s normally best to wait out the damage bankruptcy has caused and work towards establishing good habits to increase your credit score, there are some who don’t have the leisure of time. When trying to buy a home with a bankruptcy attached to your credit history there are some options:
- Choose a higher interest rate: If bankruptcy waiting times are not an option, taking on a higher interest rate may be the best choice. However, even though this option aligns with your timeline, it can end up costing you more in the long run.
- Lower debt than income: For those who can wait things out, bankruptcy does have one advantage – it lowers your debt to income ratio. When trying to qualify for a home loan, many lenders compare the borrower’s debt to income level. Since Chapter 7 Bankruptcy wipes out debt, this ratio can work to your advantage, but only if you have taken all of the steps necessary to establish good spending habits and increase your credit score.
- Wait and research: If you have the luxury of time, another prudent step in qualifying for a home loan is to carefully look over your credit report. Outside of the past bankruptcy, this gives you a chance to catch any other black marks on your credit history. It also opens the door to finding any erroneous information on your report. After looking over your history with a critical eye, you can take the time to learn from your past mistakes and challenge any errors that you may find.
We all know the housing bubble burst in 2008, resulting in over 4 million homeowners facing foreclosure. This led to a recession where lenders tightened their belts and many people were locked out of the home buying process altogether. While the combination of mass foreclosures and recession are still being felt, those who have faced foreclosure are definitely feeling the sting of the 2008 collapse.
While foreclosure has a major impact on credit score, there are options available that will help increase your credit and your chances of being approved for a home loan. Let’s start with the fact that a foreclosure will clear from your credit report after about seven years. This waiting period may seem overwhelming, but it’s best to look at it as a fresh start. During this waiting time (those who have foreclosed on a home can expect to wait three to seven years before they are able to buy another one) you can get your finances in order and take all of the steps necessary to set your credit score straight once the foreclosure is eliminated. If this waiting period is too long for your needs, another option is to speak with a knowledgeable loan officer who will work to provide answers around your specific situation and goals.
Whether you’re dealing with foreclosure, bankruptcy, or low credit score, buying a home doesn’t have to be an unobtainable goal. It’s best to start your journey to a new home or stronger credit score by talking with a qualified loan officer. At UHM, our loan officers know that everyone’s background, situation, and goals are unique. For more information about our mortgage solutions or to obtain advice that’s specific to your background, feel free to contact a loan officer today or read more in-depth blogs in UHM’s three-part series on overcoming pre-approval hurdles.
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