Search online and you will see that current mortgage rates are still at historical lows. Over the past several years rates have been consistently below 5% with lows hovering around 3%. This is a wonderful opportunity for buyers who can qualify for these rates, for others, not so much. Home buyers with less than stellar credit can usually expect to pay anywhere from 1 to 3 percent higher.
To offset these higher rates, you may be required to either pay points or make a higher down payment.
There is good news for those of us in this type of situation. By simply cleaning up these small dings on your credit, you may be able to qualify for a better rate. Listed below are a few tips to help get you started.
1. Pay off those small judgements and collections.
Before my wife and I purchased our first home, we had a few small open collection accounts on our report. Although they were both under a hundred bucks or so, the affect it had on our credit score was quite damaging. We paid off these small accounts and within a month or so, we saw a small but beneficial increase in our credit score.
While you may think that shelling out a few hundred dollars or so to pay off an old debt insignificant, do not forget the money saved through the life of your mortgage.
2. Build More Credit with Secured Credit Cards.
Once in a while, not having enough credit may be an issue. If you are part of the population that believes in paying cash for everything, you may be doing more harm than good when it comes to your credit rating. Most lenders will require 2 or more open trade lines in order to qualify for a mortgage. A simple solution is acquiring a secured credit card.
A secured credit card is where you make a small initial deposit that you can borrow against. A simple rule of thumb is to charge 30% of your credit limit and then pay it off in full at the end of the month.
3. Remove old and inaccurate information from your credit report.
Unfortunately, the credit reporting bureaus are not that great at removing negative, outdated and incorrect information on their own. It is the responsibility of the person to review their report and file disputes. Contrary to popular belief, the process is quite simple. While it may take some time and, in some instances, filing more than once, the result is extremely beneficial.
According to the fair credit and protection act, a debt may not stay on your credit report more than 8 years. In some instances where an account has been reopened, it may remain longer.
There are several credit dispute templates available that you can simply “Fill in the Blanks” and mail it off. Alternatively, you can have your credit repaired professionally for a minimal fee.
4. Avoid Furniture Shopping Until After You Close.
A few days before you close on your new home, your lender may pull a last-minute credit report. If you have any new major accounts, you may be denied the mortgage at the last minute.
Mortgage qualifications are based on certain income to debt ratios, if a new purchase throws these ratios out of wack, you can be denied the loan.
Some sound advise is to avoid and major purchases until after you close on your home. Some of these purchases include:
• New Car
• New Credit Accounts
In conclusion, these are just a few steps you can take to maximize your mortgage purchasing power as well as reduce your potential rate and fees. Some of these tips may take longer than others but any attempt you make is to your future benefit.