Your Credit, You, and a Home Loan How You Can Improve Your Credit Score Here ph
Good credit. It’s needed before you purchase a car, finance any large item, or even get a credit card. However, credit is rarely as important with these items as it is when it comes to purchasing a house. Qualifying for a loan amount of that magnitude requires the bank knowing that the likelihood of default is minimal and that the risk in securing a loan for a buyer will have a low chance of foreclosure. Therefore there are certain things that a bank wants to see before saying “yes” to a home loan. Credit Score Prior to the housing boom of 2006 credit scores didn’t play a large factor in getting a home loan. As a matter of fact, FHA loans and VA loans were not “credit score driven”. That means that as long as a borrower didn’t have many derogatory items on their credit history, they were easily able to secure a home loan, and purchase the home of their dreams.
However, when foreclosure rates began to skyrocket in late 2008, the banks changed the credit scoring requirements. After the bailout in 2009, the credit score restrictions became even tighter. As of October 2009, the chances of a borrower being approved for a home loan with a credit score of 620 or below were slim to none. Debt Ratios Banks scrutinize a borrowers debt ratios. The bank wants to make certain that a consumers debt load leaves them enough left over each month to easily maintain a mortgage payment. If a consumer’s current debt loan exceeds 40 percent of their income, no bank will underwrite a loan. However, high debt ratios are not a “death sentence” when it comes to qualifying for a home loan. There are two ways a consumer can quickly improve their debt to income ratios. Pay down the debt - This is the most “common sense” approach to lightening a debt load. Paying down debt means an increase in your available credit and will increase your credit score in less than 30 days. The more debt you pay off the higher an increase in your credit score, meaning that you will get closer to the 620 score that is required in a home purchase. However, don’t close open accounts, as this will have a negative impact on your score. Once you’ve paid down credit cards, personal loans, and student loans, leave the credit lines open but don’t use them. Increase your available credit - If you have maintained timely payments with credit card companies, you can call the creditor and request a credit line increase. For example, if you have a card with a $5,000 credit limit, increasing this to $8,000 will improve your debt to income ratio and by providing you with more available credit, decreasing your debt to income ratios.
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