In the last few months, I’ve run across a number of would-be home buyers who have weathered the worse of the economy and are now on the road to recovery and ready to move on to their next adventure. Often, unfortunately, their credit scores haven’t caught up to their new optimism when they knock on my door. Bad credit, no credit and errors in their credit reports wreak havoc on a client’s ability to secure a home mortgage.
In fact, a lot of clients are unpleasantly surprised at what their credit reports look like - even when they’ve diligently monitored their scores through various for-profit services. Those services only give its customers "soft" credit pulls or inquiries - a top level look at their credit - rather than a "hard" credit pull which is used in determining credit worthiness. A “hard” credit pull can be significantly different from a “soft” inquiry. A soft credit pull, which does not impact your credit score, can be done by any number of organizations for any number of reasons - except for the purpose of extending credit.
A hard credit pull, which does impact your score, occurs when you seek credit. It is usually more detailed and contains a longer, more detailed history than a soft pull. A hard credit report is more likely to show bad credit that the client thought had long since rolled off. It also can include erroneous entries that weren't seen on a soft pull.
I’ve also had clients with no late payments in total shock when they find that their scores aren’t where they think they should be. The most common reason is that their revolving credit cards are maxed out. Though they’re never late, they owe more than 30 percent of their credit limit.
To further complicate matters, different kinds of credits count differently toward a mortgage. Entries related to housing have more weight in obtaining - or not obtaining a mortgage - than other forms of credit.
At this point, clients are spinning. “How do I fix it?” they ask. And usually, they don’t like the answer: “It depends.” (Lots of eye rolls at this point.) But that’s the truth: the fix depends on the problem.
If your credit cards are over 30 percent of the your limit, the fix is to pay down the balance. If you’re late or behind, get caught up - and stay that way.
If you don’t have any credit, you need to open a couple of credit cards. The easiest card to get is a secured card. What to look for in a secured credit card is a whole other post, but here is a good place to start.
If your credit report has a lot of negatives entries - old charge offs, bankruptcy, foreclosures, blatant errors and the like - the fix is more complicated. At that point, you most likely need the help of a credit repair expert.
By expert, I don’t mean calling the number posted a telephone phone pole by unnamed company promising to “legally” fix your credit. You don’t now who you’re really dealing with. I have several reputable companies I can refer you to, and your lender should have some referrals for you too. A reputable credit repair company will outline a course of action that likely includes a combination of removing negative credit and adding positive credit.
How the negative credit is removed goes beyond the template “dispute” letter, and that’s where the expert part comes in. An experienced agency has a working knowledge of how the credit reporting industry works - preferably knowledge gained from working inside that system. The agency should have a deep understanding of your rights as a credit consumer and how to effectively excise those rights on your behalf.
You also want to look for a credit repair company that educates you on how to maximize your score in the future and how to handle your finances. And you’re want a company that is upfront in all their fees.
Cleaning up your credit likely will require you to follow through on your end as well - staying current in revolving credit payments, opening positive lines of credit, or paying down balances - whatever your credit adviser recommends.
Successful credit repair is neither cheap nor easy nor quick. At best is takes 30 days, but realistically it can take 4-5 months or longer. The cost is in the ballpark of $500 and up, depending on the complexity of your individual plan. You’ll also want to factor in catching up on bills and/or opening up positive trade lines.
When should you start credit repair? As soon as you’ve made the decision to purchase a home - even if the purchase is still months away.
More questions or need a referral to a reputable credit repair company? Drop me an email! Let’s start your journey to your new home!
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