4 credit repair tips for home loan qualifying

By Michele Lerner
Mortgage Credit Problems Columnist

Mortgage applicants with a credit score of 680 used to be considered good candidates for a mortgage approval, but most lenders have upped the ante, requiring 720 or 740 for borrowers to qualify for the most favorable mortgage terms. Tightened credit qualifying requirements today mean that many mortgage applicants need to actively repair their credit scores before applying for a new home loan or a mortgage refinance.

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If you have significant credit problems, you may need to work with bad credit lenders in order to obtain a mortgage. Getting on track with a new financial plan to fix your credit problems should be a priority even if you do qualify for a bad credit home mortgage loan.

  1. Check your credit report. Every consumer should know what potential lenders see when they pull your credit. If you have credit problems, it is best to know the worst of it and determine if there are errors that need correction. Go to AnnualCreditReport.com to access free yearly credit reports.
  2. Set your priorities. Start by listing all your debts, with the monthly minimum payment and the interest rate. While you must pay your mortgage or rent and make your car payment to keep a home and transportation, figure out other places where you can cut your spending to generate more funds for debt reduction.
  3. Consult with a lender or a credit counselor. A lender or a non-profit credit counselor can tell you how to make the most impact on your credit score. If you are house shopping or attempting to refinance, your focus may be to achieve a quick bump-up in your score, and these professionals can help you develop a plan. Just don't forget that your ultimate goal should be to solve your credit problems and become debt-free.
  4. Consider a debt management plan. A reputable debt management firm may be able to negotiate a reduced interest rate and an easier repayment plan for you, but note that this could actually cause an initial decrease in your credit score even if it does place you on a stronger path to financial stability. You can also try your own debt paydown plan, such as the "debt snowball" popularized by financial expert Dave Ramsey, in which you pay the smallest debt first and then apply the amount you would have paid on that debt to your next largest debt until all are paid in full.

The worst thing you can do is to hide from your credit problems -- especially if you want to own your own home. Take stock of your credit history, then identify actionable paths forward.

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