In modern America, it is agreed that home buying is always a better idea than renting. If everyone understands that, why are so many people still renting or stuck renting? That is answerable in one word. Credit.
When a buyer is approved for financing, the mortgage company is agreeing to take a risk. New real estate buyers are exceptionally risky because the amount of money they need is higher than the amount of money needed for any other kind of real estate purchase.
In order to qualify for that kind of risk, mortgage companies look at your credit. Your credit rating (the number that summarizes how good your credit report looks) typically needs to be above 600 in order to qualify for any kind of home financing. The lower your credit rating is, the higher your interest rate is likely to be. Interest is the basically the fee you pay to cover the financier’s risk, and a low credit rating means a more expensive risk.
There are three major credit-reporting companies: Transunion, Equifax, and Experian. Each of them is required by law to provide you with a copy of your credit report every year, and they have made it very convenient to do so.
Head over to www.AnnualCreditReport.com and sign up. There are a few questions to answer in order to verify your identity, then you can access all three reports. Check in with each company yearly after that, or set up a schedule where you check one every four months (Experian in January, Transunion in May, and Equifax in September, for example).
Chances are you will find something wrong with your credit report. It happens to everyone. Perhaps there is something there that isn’t yours, or maybe they have someone you’ve never known listed as a spouse. You won’t know until you check.
When you notice something wrong, make a note of the specific problem. To make corrections, write a letter to the credit reporting company and include photocopies of documents verifying your identity, and verifying which information is correct. For example, a copy of your social security card if they have your number incorrect, or a note from a credit card company stating that your account has never been delinquent.
Depending on the situation it will take 30 to 90 days for the corrections to be added to your report. The large variation is because some credit report problems require the reporting company to verify the information with the creditors.
If you’ve reviewed and corrected your credit report and your rating is still low, you are now in an excellent position to begin improving your credit. Start by sorting through your credit report and finding an item with a balance. Make payment arrangements with all of these companies. Once you know what your minimum monthly payments are, pay at least one dollar extra every month. Even such a small amount of extra effort can significantly decrease the interest owed and the time it takes to pay off the accounts.
If there are any accounts on your credit report that are delinquent, behind on payments, or in collects make those your first priority. Collections and delinquencies will still show on your credit report for a few years, but they do less damage to your credit rating if they have been paid off or brought up to date.
Finally, in preparation for a real estate purchase or sale, close out as much revolving credit account and credit cards as possible. Private label or store credit cards that can only be used at one particular store should be completely eliminated from your report. These have very high-interest rates and a mostly negative impact on your credit rating. If possible, close all but one or credit card accounts. Keep those last accounts active (use them), but never carry a balance for more than one month
If a real estate buyer has never had previous credit it can be as difficult to buy real estate as it is for those with poor credit. The easiest way to develop credit is to get a single credit card. American Express and Discover are the best credit cards to have on your report, while store credit cards (any card that can only be used at one particular store or chain of stores) are the worst.
Once you have your one credit card, use it regularly for small purchases. This can be an excellent way of tracking your expenses for a particular kind of item. Only using the card for gasoline or grocery purchases, for example, will give you a solid number at the end of the month for how much you spent in that category. When you receive that bill, pay it off completely, each and every month. This will give you a credit report that shows some activity and a very good pay off record. Minimal activity and excellent pay of records are the foundations of credit rating s that stay high from the beginning.
This is another original article by Ernst Georges, co-owner of Yanex Real Estate Investing, LLC at http://www.yanexhome.com/. Are you looking for an experienced Brooklyn, Queens, Long Island New York Investors? With a service based, business experience, Ernst Georges and Partners work hard to serve home buyers and sellers for the Kings, Queens, Nassau and Suffolk Counties and surrounding areas.