In today’s economy the prospect of getting a mortgage at favorable rates has become nearly impossible. With both Fannie Mae and Freddie Mac being scrutinized closely after the real estate bubble burst last year, the prospect of a mortgage without a stellar credit score is much more difficult. Back in 2005 and 2006 real estate values were climbing at rates that were unheard of and mortgage lenders were willing to loan money to almost anyone who could breathe with very little documentation as to income or credit worthiness.
The pervading theory was that since values were increasing so quickly many real estate investors would be flipping the properties and the original very speculative loans would be paid off by more conventional loans made to the eventual homeowner who could then tap into the equity that would build up in their own home to cover any shortfalls.
When we moved to Utah we met a couple who had just got married and within days of their honeymoon moved into a $320,000 home and she was a school teacher (2nd year) and he was a technician for Cisco ($50,000 a year). They had no down payment and qualified for a loan with an ARM at 1% for three years. I assume they worked to improve their credit ratings before applying but they still should not have qualified for $320,000. Once the ARM came due for conversion their home value had dropped 25% and they were upside down in the house and had to sell short just to get out of it. The moral of this story is to not borrow to the maximum that lenders allow just to get the most house.
The quest to improve credit ratings should not be limited to those that want to buy a house at the best interest rate possible. People who want to buy a car, boat or even get a more exclusive credit card need to pay attention to their credit scores to make sure they are as high as they can be. Almost all credit reports contain some sort of inaccuracy that can negatively affect your credit scores. If you find things that are not correct you can have them fixed by writing the credit bureau with the mistake and if they can not verify it is right within 30 day they have to remove it from your report.
Following are ways to improve your credit ratings. The first and most important is to pay all of the bills that are reported to the credit bureaus on time. Even if you are one day late it will show up and take points off your score. Whatever you do, do not allow any unpaid bill to go to collection. Any collection account is a negative draw on your credit score. The bureaus do not take into account the amount at all when deducting points from your credit score. Try to keep you balances as low as possible on your revolving balance credit cards. You are scored based on the total amount of accounts you have, the total credit limits and the percentage of credit used. The lower the percentage of credit used the higher your scores.
