Your credit score

Following on the tails of last week's post about lease-option purchases, I wanted to say a few things about credit scoring and what to do if you are thinking of buying a home but are faced with credit challenges.


The first and most important thing you can do, is sit down and get a full understanding of your situation. People are very funny about their credit. Some people with clean credit think that they have terrible credit (they were late with a payment once, 5 years ago, and think that the lender will never forgive them for it!). Other people have terrible credit and are completely oblivious. But one thing I've noticed is that when people have credit problems, they are sometimes so afraid of what they will find on their credit report that they choose not to find out what their situation is by getting a copy of their credit report.

This is like thinking you have AIDS and not getting an AIDS test. Realize that getting a copy of the test, or your credit report will at worst confirm your suspicions. Best case scenario is that you find out you were worried for no reason.


Anyway, it's important to face the music about this. Only when you understand the problem can you create a plan to solve it, and only with a plan can you put this problem in your past. This is about gaining control of your financial life, and the fact that you have bad credit is not an indictment of you as a person. I'm not sure that it's fair to say that everyone has had credit problems, but certainly, there are many people out there who have faced these problems and successfully put them in the past.


So, the first thing you should do is get your hands on a copy of your credit report. Sometimes if you are really upfront with a lender about your situation and tell them that you want to work on your issues, they will pull a copy of your credit for you at no charge. If you are not comfortable with sharing this information with anyone else, you can also order your credit reports from MyFico.com for about $16 dollars.


Go ahead and order reports from all three credit bureaus--Experian, Equifax and Transnation. It sometimes happens that things show up on one bureau but not on another. At this point, you want to know everything, so get a report from each bureau.


Now that you have the reports, you need to understand how your credit score affects you. First thing to know is that your lender is going to qualify you based on your middle score. That is, if you have scores from the 3 agencies of 650, 690 and 700, the lender will use the 690 score.


What does that mean? The lending industry is always changing but typically if you have a score above 680, you are what most lenders consider a pretty good credit risk. You should be able to qualify for better rates, and you should have many lenders and loans to choose from. Between 620 and 680, you are considered to have average credit. You can get a loan pretty easily but your rates won't be as good as "A paper." Below 620 but above 580, you are what most lenders call "C paper." You are falling into the subprime category--fewer loan programs to choose from, and the lenders see you as a higher risk so they charge a higher rate of interest.


Recently, the sub-prime and prime lending markets have really tightened up, because many of the subprime loans written under the lax lending standards of the last few years have gone into foreclosure. Because of this, there has been a shift away from sub-prime and back towards safer government loans such as FHA and VA for people with credit issues. These offer fairly competitive rates and can be good for people with credit challenges.


In my next post, I will talk about how to improve your credit, and how long it takes for changes you make now to take effect.