How to rebuild your credit

Last modified June 27, 2022
• You will want a minimum amount of 2 (open credit) trade lines, such as credit cards or vehicle installment loans. 3 open trade lines are better than 2. You will want to either have or obtain at 2 Secured or Unsecured Credit Cards to help rebuild your credit. A coouple of Credit Cards that are paid on time is the fastest way to rebuild your credit. It doesn’t matter whether they are secured or unsecured cards as long as they report to the 3-credit bureau’s (repositories). You must pay the minimum payment before its due every month. No exceptions.

• Obtain legitimate (revolving debt) Credit Cards, you should either; Google "secured credit cards" or visit creditcards.com You'll find that Capitol One, Wells Fargo, and First Premier Bank are excellent sources for secured or unsecured cards. We don't have anything to do with this website or any cards, it's just a helpful hint. You may also contact your own bank/credit union to see what they can offer in the way of secured or unsecured credit cards. Please keep in mind, “being added” as an Authorized User" to someone else's credit card will not help re-establish credit or increase your scores UNLESS your credit has also been pulled and approved by your Co-Borrowers credit card Lender. The new credit cards have to be SECURED or UNSECURED credit cards in the Borrowers name, but can be joint accounts to reflect a Joint Account / Co-Borrower. Also remember that “pre-paid credit cards” have absolutely no value or benefit to your FICO (Fair Issacs Credit Company) credit scores. You should open up revolving credit accounts that only report to all three Credit Bureau's, TransUnion, Experian and Equifax.

• Mortgage Underwriters and/or Automated Underwriting Systems require that you have at least 12 consecutive months of “clean” credit. The longer your credit is clean, the higher and quicker your credit scores will rise, the better your interest rate will be and the more Loan options you’ll have.

• IMPORTANT! Because an Underwriter/Automated Underwriting Systems will want to see a 12 month history of new and unblemished credit if you have 2 open credit cards. They would want to see 24 months of unblemished credit history if you only have 1 credit card tradeline. Right now, you're rebuilding your credit file to become "mortgage ready", 3 tradelines are better than 2, but we don't recommend any more than a total of 3 open tradelines (excluding Student Loans) when you're building credit. Keep in mind, that a vehicle or boat loan is also considered a tradeline if there are payments still required on the promissory note.

• Your short-term credit goal is a middle FICO version 5-4-2 mortgage score of at least 660 from TransUnion, Experian, and Equifax. If you are late on your payment, you will start your 12 month “clean credit” cycle all over again with the next “on time” payment. Be attentive to your credit responsibilities because it’s the only way to improve your scores. If you can pay the balances off in full every month, that should also help your FICO 5-4-2 scores improve faster. Your goal should be to have no more than 15% credit utilization (all your credit cards and combined debt) to get the (almost) maximum scores. Remember, the less you owe, the higher your credit scores will be.

• You should generally keep paying the credit card balances below 15% of their total credit line. In about 10-12 months, when one of our recommended Lenders pulls your tri-merge mortgage credit report, you should see a dramatic increase in your credit scores.

• IMPORTANT! Because an Underwriter/Automated Underwriting Systems will want to see a 12-month history of new and unblemished credit if you have 2 new open credit cards. They would want to see 24 months of unblemished credit history if you only have 1 credit card tradeline. Right now, you are rebuilding your credit file to become "mortgage ready", 3 tradelines are better than 2, but 2 is essential. We don’t recommend any more than a total of 3 open tradelines (excluding Student Loans) when you’re building credit. Keep in mind, that a vehicle or boat loan is also considered a tradeline if there are payments still required on the installment note.

It is true that Student loans are possible tradelines. However, if your Student loans have been “deferred” or are on the “Income Based Repayment program” for quite a while, there’s a good possibility that those loans may be actually hurting your credit scores. The reason being is, when those Promissory Notes were established, the Lender loaned you a specific amount of money. However, if those loans (Principle & Interest) have not been paid down consistently on the typical original Amortization schedule set to pay off the balance, the current balance of the loans is now higher than the original balance was when you first obtained the loan. In effect, while your loans are deferred, or on the Income Based Repayment program, the new monthly balances, (money you now owe) increases every month. This means you are actually “overdrawing” your account every month. Unfortunately, the net effect is like exceeding your Visa, Mastercard, AMEX borrowing limit every month. We know that “overdrawing” (an account of any kind) always decreases your credit scores.

We would strongly recommend that you go to myfico.com and obtain your true FICO-5-4-2 Version Mortgage scores and your real credit report. Please review this credit report to make sure there is no fraud or accounts that are not yours on the report. You should also pay the monthly subscription fee of $39.95 per month to MyFICO.com. This process will set you up to automatically get your TRUE monthly FICO credit scores and intermittent updates. This is a very critical step when trying to become "mortgage ready", especially if you have had some past credit problems. MYFico.com is owned by Fair Issacs Company. These are the people that Invented credit scoring that the 3 credit bureaus.

We recommend that you check your Credit Scores every month and follow the advice of myfico.com. They charge $39.95 per month for a 30-day subscription. You will recive your real credit reports from each INDIVIDUAL repository and you can look at the credit reports and updates to make sure all the accounts are yours and what you need to do to “clean up your credit”. We want you to succeed!

Please also understand that there are 3 different type credit scores available to creditors from each of the Credit Bureau’s. One type of score is for mortgage loan scores, (the mortgage scores are the most conservative), another type is for credit cards (revolving debt), and still another is for installment (vehicles, boats personal loans, debt consolidation loans etc…) Please be aware that if you get a credit score from your own credit card company (maybe even Experian), you can expect to see the scoring model for Revolving debt. This score will typically be higher than a Mortgage score from the same Credit Bureau. This mistakenly makes you believe your credit score is higher than it probably is, especially if you compared it to the Mortgage 5-4-2 FICO version of the same Credit Bureau.

All institutional Mortgage Lenders ONLY use FICO Version 5-4-2. As of 5-31-2022, the Institutional FHA and Conventional Lenders have not and do not use FICO versions 8 or 9 or any other television advertised credit provider.

Please do not overdraw your checking account because the Underwriter will see “Total Overdrafts for the Year” and it needs to be 0. Do not spend money you don’t have.

Please remember that you cannot have a late payment on a credit card, car loan, student loan or any credit for 12 months prior to obtaining a mortgage loan. You will need a middle credit score of at the very least 660 to qualify for most Down Payment Assistance or First Time Home Buyer assisted mortgages. Preferably you should have a score 700+ to qualify for Conventional Loans.

Please understand that regular FHA Loans that do not include down payment assistance can go as low as 580-FICO 5-4-2 for most FHA approved Lenders. Our Lenders work with those programs as well, but DPA mortgages with financial assistance always requires higher FICO scores and have greater credit and financial requirements for down payment assistance.

Mortgage Loan approvals and interest rates are based on elements of risk. The lower the FICO middle score is likely because of the more credit Collections, or late payments in excess of 30 days. The lower the credit scores, the lesser the chance the loan will be approved without additional guideline overlays. An FHA loan may be approved with lower FICO scores but of course the interest rate will be higher than if you have at least a 660 FICO 5-4-2 credit score. With middle FICO scores less than 640, the required down payment will not be coming from any down payment assistance program that is currently in the marketplace and the FHA down payment of 3.5% will be coming from you. A file with low scores will have a much higher level of scrutiny and risk of being declined.

Please remember, the higher the middle credit score, the easier the process will be when your loan goes through Underwriting, the lower your interest rate will be and the more mortgage loan options you’ll have when the time comes.

There are several Down Payment Assistance programs that fit a wide range of incomes and occupations. As of June 1, 2022 in the Florida Real Estate market, as a Buyer you can normally expect to pay all of your Closing Costs yourself. This can be supplemented with a Lender Credit if you have very high credit scores. A good ballpark estimate of how much money you will need for your Closing Costs will be between 2.5% - 3.5%. The more expensive the property, the Closing Costs will be higher but the percentages will be lower. That is in addition to your down payment amount if you don’t use DPA funds.

Depending on the price of the property, Loan program that is used, and if you have at the very least, $9,000.00 and you are ready to purchase a home, you may be able to purchase a very nice home for approximately $9,000.00 "out of pocket" investment. That money is used for your Earnest Money Deposit (part of your closing costs or down payment), and the Appraisal, Home Inspection, possible termite report and any Closing Costs that can't be negotiated from the Seller.

You almost never pay Realtor commissions because the Seller pays all the Real Estate commissions when they sign the Listing Agreement.

From the time that you have a home under contract, the lending process takes approximately 35-45 days until you move in. That time frame is also dependent on your cooperation with your Mortgage Lender and how fast you can produce the financial and personal documentation and information to the Lender. The longer the Buyer/Borrower takes to get the required information to our Mortgage Loan Officers, the longer it takes for loan approval.

Some of the DPA programs do occasionally run low on funding or without notice can be eliminated altogether. Programs often change with very little notice. After you have worked on your credit and you are ready to be pre-approved by one of our Lenders, please update your and we'll get you Pre-Approved by one of our Approved Down Payment Assistance Lenders.