| If you have had credit troubles in the past, you know | | | | Furthermore, a bankruptcy will fall off your credit report |
| that these things can plague you for years, making it | | | | after 10 years, and collection accounts and late |
| difficult or impossible to obtain credit. If you can get | | | | payments, after 7 years. For that reason, if you have |
| new credit, often times interest rates and payment | | | | an old collection account that is, for example, 6 years |
| terms are ridiculous. | | | | old, it may be in your best interest to not pay it off. |
| Why is this? | | | | In fact, you should speak with a mortgage professional |
| Lenders look at each borrower in terms of risk. They | | | | before paying off any collection accounts. Many |
| look at factors such as credit history, job stability, | | | | applicants mistakenly think that if they pay off |
| debt-to-income ratio, percentage down payment, | | | | collection accounts that their credit score will go up. |
| property type, and many other factors. If you have | | | | This is not necessarily the case. The reason is that if |
| had recent credit troubles, you are considered a | | | | the collection account is paid off, it will still be on your |
| greater credit risk. A person who is a greater credit | | | | credit report, but it will just show that it is paid. When |
| risk will have a greater likelihood of foreclosure; | | | | you pay it off, your credit report will show that the |
| therefore, the lender must charge a higher interest rate | | | | credit line has been active in the past couple months. |
| to compensate for this fallout in non-performing loans. | | | | The credit scoring model places the most weight on |
| Let's start out by talking about some common credit | | | | credit lines that have been active within the past 24 |
| problems and how lenders look at them. Then, I will tell | | | | months. So although the collection is paid off, it is still a |
| you how to build your credit profile as best you can to | | | | negative credit line, and if it was active in the past |
| not only obtain a mortgage, but to get the best | | | | couple months, it could temporarily bring your credit |
| possible terms given your past credit problems. | | | | score down. For that reason, on collection accounts |
| Credit Problems and How Lenders View Them | | | | that are more than 24 months old, I always advise my |
| One of the most common problems I see on a daily | | | | clients to wait to pay them off until after closing. If the |
| basis is collection accounts. Collections generally fall | | | | lender requires the collection to be paid as a condition |
| into two categories: medical and other. Medical | | | | of getting the loan, the collection can usually be paid at |
| collections are not as big of a concern to lenders as | | | | closing. |
| they many times are not preventable. If you have | | | | One of the most common problems I see, especially |
| minor medical collections and no other derogatory | | | | with my clients with past bankruptcies, is reporting |
| credit, you may still qualify for a prime loan (designed | | | | errors on the credit report. By this I mean that credit |
| for those with perfect credit). However, if you have | | | | lines are being reported wrong. Many times, if you had |
| any other collections that are not medical, you will likely | | | | a bankruptcy, the credit bureaus will still show some of |
| have to pay them off at closing in order to qualify for | | | | the accounts open and delinquent. You can do |
| a prime loan. However, there are plenty of lenders out | | | | wonders for your credit just by challenging these items |
| there who will approve your loan despite thousands | | | | and getting your credit report updated. There is more |
| and even tens of thousands of dollars of collection | | | | on this topic, with sample cover letters, in the credit |
| accounts. | | | | repair section of my website. |
| Another problem is lack of credit accounts. What I | | | | If you have suffered a bankruptcy, one of the best |
| mean by credit accounts are open and active credit | | | | things you can do to start building your credit score is |
| lines such as auto loans, student loans, credit cards, or | | | | to re-establish credit. By this I mean that it is essential |
| mortgages. If you are looking to borrow more than | | | | to get some new, clean credit going as soon as |
| 90% of the sales price of a home, or you are trying to | | | | possible. One way you can get the ball rolling is by |
| qualify for a prime loan, most lenders will require you to | | | | obtaining a secured credit card from your bank. A |
| have at least 3 credit lines that have been open for at | | | | secured credit card is one where you put enough |
| least 24 months. Some lenders have looser | | | | money in a side account to cover the max (which is |
| requirements, however, and will allow closed accounts | | | | usually only a couple hundred bucks). Use the credit |
| to count as credit lines, or will allow "alternative" credit | | | | card each month on a tank of gas or some groceries |
| lines such as documentation of cell phone bills or rental | | | | and then pay off the balance in full. In this way, you are |
| pay history. | | | | establishing a positive pay history. Before you know it |
| Bankruptcy is a problem that many people have faced | | | | you will be able to obtain an auto loan and perhaps a |
| with the tough economy in the United States the past | | | | "normal" credit card. As we discussed earlier, lenders |
| several years. The good news is that there are | | | | usually want to see 3 open and active credit lines, so |
| lenders out there who will give you financing, | | | | you should work toward that goal as soon after |
| sometimes 100% financing, if you are only one day out | | | | bankruptcy as possible. |
| of bankruptcy. | | | | A Few More Thoughts |
| Foreclosure on a past home doesn't necessarily | | | | Another key to getting a mortgage that is worth |
| disqualify you from getting a mortgage. | | | | mentioning in this article is job stability. Although this is |
| Judgments and tax liens can be a problem as these | | | | not tied directly to credit reporting problems, you should |
| creditors could seek a lien against your home, which | | | | keep this in mind if you are looking to buy a house. |
| lenders don't like. However, if you can document that | | | | Lenders want to see a two year history in the same |
| they have been satisfied or that you are in a pay plan, | | | | line of work. If you have been with the same employer |
| you will usually be OK. If they are not in a pay plan or | | | | for these two years, that's even better. Stability is key. |
| paid off, you will likely have to pay them off at closing | | | | If you are looking to start a business, wait until after |
| as a condition for getting the loan. | | | | you buy the house. The reason is that lenders will not |
| Late payments are the most common problem with | | | | allow you to use the business to verify employment |
| people's credit. Even people with very high credit | | | | history until you can document that it has been in |
| scores may have a 30 day late or two. Mortgage | | | | existence for at least two years. Therefore, it will be |
| lates will affect your ability to qualify and what kind of | | | | nearly impossible to get a mortgage, especially if you |
| terms you can get. Consumer lates (credit cards, auto | | | | have had credit problems recently. |
| loans, etc), may not affect your chances of getting a | | | | If you are currently renting, you should also make sure |
| mortgage at all, unless you are attempting to get a | | | | you pay your rent with a check so that you can |
| prime mortgage. | | | | document a paper trail of paying rent on time. In the |
| How to Deal With These Problems | | | | absence of open and active credit lines, the ability to |
| Now that we have discussed some common credit | | | | document rental pay history can make or break the |
| reporting problems, let's get into how to deal with them | | | | deal for you. I have seen it too many times where |
| and get the best possible mortgage approval. | | | | someone is otherwise a reasonably strong candidate |
| First of all, it is important to understand that lenders | | | | for a mortgage, but they can't document their rental |
| view your history over the past 24 months with the | | | | history, so the lender rejects their application. |
| most scrutiny. For example, a bankruptcy that is more | | | | I hope this article has helped you with some tips on |
| than two years old will be easier to overcome than | | | | preparing for your mortgage application after suffering |
| one that is 2 days old. Late payments and collection | | | | some credit setbacks. Getting a mortgage with poor |
| accounts that are at least two years old will have less | | | | credit can be easy if you are working with a mortgage |
| weight or might be ignored all together. | | | | professional who can guide you down the right path. |