Position Your Credit to be Approved for a Loan!
Most mortgage lending companies will ask you to allow them to “run” your credit, meaning they will request information on your credit from various credit rating agencies. RFG uses what is called a tri-merge report, which gives credit scores from three different credit reporting agencies. The scores are called FICO scores and the score is derived from several different factors.
The exact method by which FICO comes up with a credit score is one of the great mysteries of the universe, but some things are known and other things suspected to be factors in the credit score formulation.
Even the mere search for credit will impact your credit score as it means you are looking to borrow additional money, to the detriment of all of your existing creditors. Each dollar you owe means that you could be closer to defaulting on all of your credit. Different types of inquiries, however, can have a different effect.
Avoid These Things to Protect Your Credit Score
Credit checks for a consumer credit card will have the most detrimental effect on your credit score, as you are applying for credit that will presumably increase your liabilities over time. The more credit card type checks you have, the greater the detriment, because the presumption is that you may be taking on several new credit obligations. Therefore, if you intend to be shopping for a mortgage loan in the foreseeable future, resist the urge to obtain additional credit cards, which will almost always involve a credit check, lowering your score each time that credit check is run. In addition, once approved for the credit card, the potential of owing money on that credit card, even if unused, will further lower your score.
Credit checks for automobiles and mortgages are viewed differently by the credit reporting agencies. Multiple credit checks for this type of loan are generally viewed as “shopping around” for the best rate, and will only lower your score the value of one credit check, provided they are done within a very short period of time, usually fourteen days. The logic behind this is that even through multiple lenders may check your score, you are only going to take out one mortgage or car loan at a time, not multiple loans. Therefore, if you are applying for secured credit, make sure to do so within a limited period of time, to avoid each inquiry by competing lenders from lowering your score.
Build a Positive Borrowing History
In addition, auto loans and mortgages are debts that are paid down over time, they do not increase or have “limits” like credit cards do. Therefore, it is presumed that if you have had an auto loan or mortgage loan for a significant amount of time, you are likely to continue paying that loan, as it is constantly decreasing. Accordingly, if applying for a mortgage loan, make sure that all of your payments on this type of credit are made ON TIME for at least six months before you apply for additional mortgage credit.
Further, an important factor is compiling your score is your payment history. Late payments on both revolving consumer credit and mortgage loans will hurt your score, but late payments on mortgage loans will hurt your score more. One of the best ways to increase your score is to create a history of timely payments on all outstanding credit.
Another factor that can be detrimental to your score is habitually using your available credit, either credit card or lines of credit to their maximum value. Credit raters view these types of borrowers as those who may not be responsible in handling their debt. The lower your utilization rate of available credit, the better off your score will be. If thinking about applying for a mortgage loan, make a concerted effort to pay down your outstanding credit to below your credit limits.
Lastly, the credit score is affected by the different types of credit that a borrower may have. A borrower with only credit cards will score lower than the same borrower with credit cards, mortgage loan and auto loan, all paid on time over an extended period of time. These types of borrowers are deemed to generally represent less risk to lenders.
Great Credit Shows Your Lender that You’re Responsible
Getting your credit in shape is the most important thing you can do to increase your chances of bing approved for a loan, followed by having an organized business plan for your flip. Improving your credit will take some time and strategizing, but it can be done. Now that you know the important components, get to work making your score as strong as possible, so you can move forward with your loan approval soon!