Understanding Your Credit
For many of us, debt is a way of life. Installment payments and credit cards can be useful financial tools. But if not controlled, credit eventually can control you. To qualify for a mortgage loan, your credit history doesn't have to be spotless, but your history must clearly show your willingness to pay your debts.
Your Credit Report
When you apply for a mortgage loan from any lender, they'll look at your credit record to see if you've been responsible about managing your debts. Your credit record can be obtained from a credit bureau - an agency that gathers statistics on individual payment records on loans, credit cards and other debts. Federal law gives you the right to review your own credit record, and it's smart to do so before you apply for a loan. Most credit reporting agencies won't give you credit information over the telephone, but you may request your credit report in writing or in person or online. If you do it in person, be sure to take along identification. For a small fee, the agency will give you a complete report that shows your current debts and payment history. Go to www.equifax.ca to get your report.When you get your credit report, look at it carefully for any past-due or written-off amounts. Remember that poor credit will prevent you from qualifying for a loan. Make sure the credit report's information about you is correct. Your lender may need a written explanation for any late payments. Because credit reports usually list account numbers, loan terms and various codes, you may find your report a little confusing. Your lender can help you go over your report and explain any items that aren't clear.
Correcting Credit Problems
If your credit report includes little or no information, include letters of reference from a lender or landlord to demonstrate your payment history. This information will become part of your application for a mortgage loan and typically, in these situations, a larger down payment would be required.
If you have a credit problem because of an unusual situation, write a letter of explanation. Your lender may overlook a credit problem if you can give a good reason for not making your payment. If you normally pay your bills on time but failed to pay one because of an unusual or temporary situation, write a letter that explains in detail why your payment was late. This letter will become part of your loan application.
If you're constantly struggling to pay your bills, seek professional help. Organizations exist which can help you develop a solid plan for regaining control of your finances. It's important to let your creditors know if you're having problems making payments. In many cases, creditors will help you relieve your situation. Remember: creditors don't want to lose money, and they want to help you pay them back. For example, some bank credit card companies will reduce your monthly payment and give you more time to pay if they know you're having problems meeting your current payments.
Credit Tips
- Plan major purchases carefully and do not accumulate excessive amounts of debt.
- Pay down existing debts and ensure bills are paid on time, especially minimum payments on credit cards. If necessary, postpone major purchases until you can save the money required.
- Avoid large purchases before buying a house, since the added debt will affect your mortgage qualifications.
- Use credit responsibly. Establishing a track record of on-time payments will improve your credit rating.
- Avoid skipping bills to make other payments since missed payments appear on your credit report and create longer-term problems.
- Avoid defaulting on payments. Delinquent payments, collection items, and court judgments stay on your credit file for six years, even if you subsequently pay them.
- Save money regularly for financial emergencies. You also can arrange for credit lines to cover short-term cash
- Increasing Your Credit Score
Good credit translates into lower rates for the borrower!Here are just a few quick tips that can help put you in a better position under the discerning eye of an underwriter!
HOT TIP! Do you have past due balances that have been neglected? If they are showing up on your credit report and you want to purchase a home, make sure you bring them up to current status whenever possible.
HOT TIP! Do you have outstanding debt that you can afford to pay off right now? Try to get these accounts down to a zero balance, or at least a lower balance. If your cash on hand doesn't allow you to do this, try to distribute the debt amongst other open credit cards. You can also consider opening a new line of credit and transferring part of the balance off a card that is close to being "maxed out." If you can get the resulting balances below 50% of the available credit, you're on the road to improving your credit score considerably in most cases.
HOT TIP! Do not close existing credit card accounts, even if you don't want to deal with the company any more... Believe it or not, the credit history is a good thing to have!
HOT TIP! When married couples keep separate credit card accounts, some or all of the balances can be transferred to one spouse's list of accounts. This gives the other spouse an opportunity to increase their credit score and designate him or herself as the sole borrower on the mortgage loan. Ownership of the home can remain in both names!
HOT TIP! See if your credit provider will increase your available lines of credit. This can, in turn, reduce the overall debt ratio, but only do this if your credit card company can do that without a hard credit inquiry.
HOT TIP! Do you have past dues and charge-offs within the last two years? Pay them off now, if you can! Past dues older than two years will have little to no impact on your credit score if they are paid, but can possibly bring the score down, which is something we don't want to do... Focus on that 2-year time frame.
HOT TIP! Do you see errors in your report? Request the credit bureau delete any outstanding debt that is incorrectly charged to you, or things that should have been removed that you have already paid. They have an obligation to reconcile this within 30 days. If you see items on your report that are less than two years old and you have the money to pay it off now, mark the back of your payment check with the following notation: "Accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit record." If necessary, you can use this cancelled check as proof of the transaction in the event the outstanding debt is not removed promptly and interferes with the closing of your loan.
