A buyer's primer

Repairing your credit

Bad credit is one of the primary reasons many consumers aren’t able to buy a home of their own – or refinance their current mortgage to a more favorable interest rate. Knowing what lenders see when they look at your credit report is the first step. If your credit needs fixing, don’t despair. There are steps you can take right now to get back on track.

Pay bills on time. When you are delayed or delinquent in a payment, creditors rack up the late fees, you accrue more interest on money you’ve already borrowed, and your credit health suffers.

Contact your creditors immediately if you are unable to pay your bills on time, or if you have found an error in a bill – and especially if there’s an error on your credit report. Order a copy of your credit report at least once a year from each of the three major credit-reporting companies (TransUnion, Experian, and Equifax) to stay on top of changes to your credit profile and to check for identity theft. Be sure to make any complaints – and get any corrections – in writing.

Keep your debts reasonable. Financial experts say that, as a rule, non-mortgage debt payments shouldn’t exceed 10% to 15% of your take-home pay each month. That’s tough to do if you get into a financial bind, so if you have credit-card debt that’s more than 15%, get assistance from a credit counseling service to get those debts down to a manageable level.

Avoid unnecessary inquiries. Any time you authorize a creditor or other business to check your credit report, an inquiry is added to your report. If you have a lot of inquiries in a short time, creditors might think that you’re either applying for too much credit because of financial difficulties or taking on more debt than you can repay. So, if you’re trying to buy a house, hold off on buying a car or other big-ticket items until your loan is approved and you’re sure you can afford the extra payments. (Ordering your own credit report directly through the credit-reporting agencies will not lower your credit score.)

Don’t close unused accounts. In the short-term, closing unused credit cards could actually push your credit score lower. So if you plan to apply for a mortgage soon, a better move is to pay off any outstanding balances and keep balances on your credit cards low.

Talk to your creditors. If you aren’t making timely payments, don’t wait for your account to be turned over to collectors. Your creditors may be able to help you get on a lower interest payment plan or agree to a settlement. Remember, creditors are much more reasonable if you’re making an effort to settle your debts.

Consult your REALTOR®. REALTORS® can be a great resource when it comes to cleaning up your credit and buying a home. Believe it or not, bad credit and homeownership are not mutually exclusive. For example, there are many federal programs that are designed to help would-be homeowners overcome bad credit to own a home – and Realtors are involved.

As part of its Borrow with Confidence campaign, the Texas Association of REALTORS® and Fannie Mae have trained REALTORS® on flexible mortgage products that address barriers many borrowers face, such as a lack of downpayment funds, blemished credit, and major debt. Your Realtor will also have access to lists of lenders who offer mortgage products tailored for different situations, and local counseling agencies that help borrowers who may need additional help preparing themselves for the home-buying process.

For more information on cleaning up your credit, contact a nonprofit credit counseling agency, such as the Consumer Credit Counseling Services at 1-800-308-2227 or www.moneymanagement.org.