Repairing Your Credit

Building Excellent Credit . . . and How to Invest even if you Don't Have it

Banks have been tightening up credit requirements, and the days of nothing-down, no-documentation “cheater” loans are over. Today, you’ll need better credit and more money down. The good news is, it doesn’t have to be that hard. Unless you have large amounts of cash on hand, you will need credit. Fortunately, building good credit doesn’t cost much. There are three basic pillars to credit building:

•    disputing items
•    applying for credit
•    keeping utilization down

As to the first item, start by reviewing your credit profile and disputing any potentially incorrect items and requesting that they be removed. Surprisingly, many credit reports contain incorrect or outdated items, and legitimately requesting that these be deleted will give you a quick boost. Pay more attention to items that are larger and more recent, as these will be costing you more points on your FICO score than will a six year old item for $20. If there are collections or past due accounts that are legitimate, pay them off if possible, negotiate for a smaller payoff, and request that the creditor delete the item in exchange for your payoff. Get it in writing.

Working on your credit is a long-term, ongoing process, but no matter where you are in the process, you will have something positive to show a lender. But don’t wait for the perfect 850 FICO score (almost nobody ever gets that)! Work with what options you have.

Although credit is tight, do not assume that you will not qualify because of your poor credit, you may get surprised. Fill out the application anyway, even if you think approval is unlikely. Even if you are rejected, you will have an opportunity to find out exactly where your financial weaknesses are, and what the lender may need to approve you. A mortgage rejection is not the end—only the beginning. Tackle the specific areas that led to your rejection and attempt to remedy them, or at least document that you are working on them, and then try again.

If conventional financing is still not an option, all is not lost. Some of the more “creative” financing options are no longer available, but some are—and don’t be afraid to make suggestions. One possibility, if you have a motivated seller, is that the seller will carry a second mortgage. If the seller carries, for example, 20 or 25 percent, then the conventional lender may be more willing to approve you—especially if you have some cash to go along with the deal.

Common Sense Tips to Credit Worthiness!

At the same time you are removing bad items from your credit report, you should be adding good ones. Despite the bad press about credit cards, it is still good to have two or three of them, for two reasons:

•    First, you can use them in emergencies
•    Second, you can use them to build your FICO score. Get the highest credit limit you can get—but don’t use it all. Having a high credit limit and then spending your limit will cost you points, even if you pay on time every month. Your score increases when you have a low utilization rate, ideally below 25 percent, but absolutely no more than 50 percent. That is, if you have a $10,000 credit limit on your card, never have a balance of greater than $2,500.

Take Proactive Measures with Your Credit!

As a Denver real estate investor and a credit builder, you’ll need to become a paperwork hog. Keep track of everything. Here’s where you can finesse your mortgage applications even if your credit is a little under par. It may well be that there are some items on your credit report that you haven’t been able to pay off, and haven’t been able to make go away because they’re legitimate debts. These items are costing you FICO points and could cause a lender to reject a mortgage application. But—instead of trying to ignore the problem, be up front with the lender and explain the item in detail.
•    Provide them with paperwork that explains how the debt occurred, and what action you are currently taking to address the problem.
•    Prove that you have taken proactive measures to address a black mark on your credit (such as entering into a written agreement with the creditor to pay it off), and often, the lender will overlook it.
•    And remember, getting rejected is not the end of the world. Keep close track of your FICO score by subscribing to MyFICO.com and apply again when you have improved it. Be aware that your score naturally goes up and down, sometimes significantly, and applying for a loan at just the right time will make all the difference. Know what your score is ahead of time, and make your applications when it is at its peak.

Now would be an excellent time to read our Introductory Investor article on The Denver Economy!