Credit Card Hacking To Improve Your Mortgage Application »RealtyBizNews: Real Estate News
There is no secret formula to achieving a perfect credit score in 30 days or less. A perfect score takes a few years with good spending habits, paying bills on time, and learning what the credit bureaus look for in a perfect borrower. One of those rules is to keep credit card balances near 30% of your limit while continuing to use the credit card periodically. For credit score bureaus, this demonstrates responsible borrowing.
That said, there are quick steps you can take to improve your credit history in a few months from where it is now.
The first thing to do is get complete copies of your three credit reports. Before you can take action, you need the details in the reports, not just your score. You are entitled to a free copy of your credit report every 12 months from each of the three national credit bureaus. Order online from annualcreditreport.com, the only authorized website for free credit reports.
With your reports in hand and well researched, your first step is to find ways to remove the negative items. You will need to learn to read the codes on the report. Once you do, you can dispute the negative items. Describe specifically what you think is incorrect when writing protest letters. The trick is knowing that you don’t have to prove that the negative event didn’t happen. Instead, the credit card company must prove that this has happened. If they can’t prove it within a short period of time (often they can’t prove it), the credit bureaus should remove it from your report and your score should go up. You want to dispute them individually with each of the three credit bureaus, because one bureau’s removal of the negative event will not automatically remove it from the other two.
Then rebuild or improve your credit using a secured credit card. A secured credit card is backed by a cash deposit that you make when you open the account. The deposit is usually equal to your credit limit. So if you deposit $ 200 you will have a limit of $ 200. It sounds counterintuitive, but opening a new account and using it responsibly will improve your credit score. It takes a bit of time, so you need to do this at the start of the credit repair process.
Ideally, if your credit is badly damaged, you want to start repairing it at least a year before you apply for a mortgage. But it’s never too late or too early to start improving your credit score. Here are some more tips to get you started right away.
1. Know the difference between installment loans and revolving credit. The way you pay for each makes a difference in your score. Installment loans are things like cars and appliances that when you pay them off, the loan is closed. Student loans fall into this category but have different rules. Revolving credit is your credit card. As you make payments on these, it frees up more credit for you to borrow in the future. Revolving accounts don’t just close because you paid for a purchase. If you can pay off installment loans quickly while staying up to date with revolving accounts, it improves your credit score by improving your debt-to-income ratio. He also creates accounts closed in good standing. This can be more effective than making large payments on high interest accounts just to reduce your monthly payments.
2. Close those secured credit cards as soon as you no longer need them. You use a secured credit card as a stepping stone to get approved for a major credit card. Once you are approved for a major credit card with a reasonable interest rate, you want to close the secured card. This is one of the few times you want to close a credit card in good standing. What you want to achieve is to have three major credit cards in good standing and pay attention to the rule that the balances of the top three are near 30% of your limit. This is how good credit is built quickly.
3. Be very careful and attentive when applying for new credit. Think about how you’ll be using these top three new credit cards. Applying for a mortgage will take a particularly careful look at your debt-to-income ratio. According to the FHA, “The FHA allows you to use 31% of your income for housing costs and 43% for housing expenses (utilities, groceries, etc.) and other long-term debt.” These numbers may vary depending on your current credit score. You need to make these major credit card amounts match the formula of the FHA (or other lenders). The math is pretty straightforward. You calculate your DTI ratio by dividing your total monthly debt by your gross monthly income (before tax). For example, if your monthly recurring debts total $ 2,000 and your gross monthly income is $ 6,000, you have a DTI ratio of 33% (2,000 ÷ 6,000 = 0.33 or 33%).
Basically, the mortgage loan application seeks an acceptable credit rating and debt-to-income ratio. It’s also not a specific number that you need to hit perfectly. But you have to be within the acceptable ranges for both. And they work in tandem to determine if your mortgage application will be approved. The lower your credit score, the higher your mortgage interest rate will be. A higher interest rate means that your housing costs will be higher in the debt-to-income ratio. All of this should match the formula based on when your new mortgage payment is included in the calculation.
What quick tips can you offer to improve your credit score and debt-to-income ratio? Please leave your comments.
Additionally, our weekly Ask Brian column welcomes questions from readers of all levels of experience with residential real estate. Please send your questions, inquiries, or story ideas to [email protected]
Author Biography: Brian Kline has been investing in real estate for over 35 years and has been writing about real estate investing for 12 years. He also draws on more than 30 years of business experience, including 12 years as a director at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination, close to a national and the Pacific Ocean.