Honest Mortgage Answers

Getting strict on bad credit

Well, the honeymoon is over. More and more lenders are tightening up the requirements for bad credit mortgages. For a while there, the minimum credit score for 100% financing on a single family residence was 580. I've got some bad news. The majority of lenders that specialized in that loan product have increased the minimum credit score to 600. Now there are a few stragglers left but they most certainly have increased their rates through the roof on these loans. Credit scores aren't the only requirement for these loans though. Most of these lenders requirement that a borrower have at least 3 major tradelines open and in good standing for at least 12 months. Translation - 3 credit lines/loans with no late payments for last 12 months. Again, there are exceptions but you pay for the exception.

I guess the question everyone is asking is "Why the change?" It has to do with the number of foreclosures and defaults from these borrowers, plain and simple. There is certainly a higher risk offering these types of loans and lenders are finding out how hard it is to sell a home on today's market. The loss from these lenders is increasing and it doesn't look good for future borrowers.

What can be done about this change? Well, there needs to be a change in strategy. It is possible to raise a person's credit score 30-40 points in a relatively short amount of time. Follow these simple steps: Obtain a copy of your credit report from all 3 bureaus. This is your template to work with. If there are errors on any of them, dispute them with ALL 3 bureaus. Bring past due accounts current. Keep proof of this and submit it to the credit bureaus if need be. Pay your balances down to under 25% of the available credit limit. If you have 3 tradelines, don't open new accounts. Don't open new accounts. Don't open new accounts (is there an echo in here?). Don't close ANY open accounts. Pay them off but don't close them. Don't apply for several different types of accounts at once; meaning don't apply for an auto loan, credit card and bank loan all within a 30 day period. It doesn't look good. If you must apply for credit and shop around for the better deals, limit your inquiries to a 14 day window of time. Don't apply anymore after the 14 day window. Make sure the credit inquiries are for the same purpose. Lastly, try to avoid "Financial Companies" when obtaining credit. In other words, avoid the high interest personal and auto loan lenders.

By taking these simple steps, you will be on your way to a better credit score and more appealing loan terms.

Posted by Jason Lash at 9:28 AM