9 Myths to Building Credit For a Home Mortgage

If you think home ownership is beyond your grasp, think again. Many prospective home buyers continue to rent year after year because they believe they have no other options. That's because they've been told all the reasons they can never hope to qualify for home ownership. If you find yourself in that situation, it may be because you've been given misinformation about building credit for home mortgage qualification.

Here are 9 of the most common myths about qualifying for home mortgage financing:

1. All "bad credit" is created equal

There are a number of options available for those with less-than-perfect credit. While a better credit score may get you a better interest rate, having a lower credit score, or even no credit at all, does not automatically disqualify you from home ownership. This is particularly true for those who have gone through financial hardship, causing them to have difficulty keeping up with bills.  Certain types of delinquent accounts and how recent they are will have a greater impact when it comes to lending decisions.

2. Paying off all your old delinquencies removes them from your credit

Delinquent accounts that have been paid will typically remain on your credit report for seven years following the last activity date. Paying collection accounts will not remove them from your credit report nor will it immediately raise your credit score.  But over time, paying off collections and staying current on your current bills can make a big difference.

3. You will need to get a credit card or another loan first

Any new debt will initially be bad, credit card or loan included, but over time paying the monthly amount due on these loans can build your credit score over time.   Also, applying for credit at multiple lenders within a short time period can harm your credit score.  There are specific options for those that lack enough "trade lines" on their credit report to give enough history to the lender:

• Find alternatives to debt if you can, and see if you can build your credit by simply paying your existing bills on time.  
• Apply for a "credit builder savings program" or "credit builder loan program".  These are programs help you build credit, but don't put you in debt.
• See if you can be added to existing household monthly bills.  

You typically shouldn't need to you put yourself in debt to establish your credit.  Even if it turns out to be good for your credit, it could also destroy your personal finances and cost you money.

4. Disputing credit report items is easy for everyone

You can dispute credit report items by contacting the three major credit bureaus or the original creditor. However, this can be a tedious task and in some cases, you could end up harming your credit further if a disputed item is actually verified and found to be true.  Clearly, if there is something wrong it should be verified or disputed and working with an experienced financial coach can help you do this appropriately and to maximize the impact.

5. Open a bunch of new accounts to build your credit

Too many open accounts can make a lender believe you have too much available credit. In the eyes of most lenders, available credit is credit that could be used at a later date, risking your ability to make a mortgage payment due to the financial burden of making other credit payments.

6. Pay off all your loans before applying for a home mortgage.

Paying off all of your loans before applying for a home mortgage could actually harm your credit score. That's because open accounts that are being paid each billing cycle as promised continue to contribute to your good credit standing.

7. You can't have anything negative on your credit.

Perfect credit is not required for home ownership. There are many pathways to home ownership available today for people who have had credit problems.  This includes rent-to-own and land contracts.  If done right, you can achieve ownership by completing a Buying Plan that improves credit and your personal finances. 

8. Your credit is affected by the money you have saved in the bank

Your savings account has no bearing on your credit score. Wealthy people are not immune to low credit scores nor do all people of more limited means have struggles with their credit standing. Your credit score is just that: a reflection of how you have used credit in the past.

9. There are no paths to home ownership as you are establishing and rebuilding your credit

There is no better cure for less-than-perfect credit than the passage of time, paying all bills on time (all the time), and not taking out any new unnecessary debt.  But this doesn't mean you can't begin reaping the benefits of home ownership now.  In Milwaukee, rent-to-own programs done right can allow you to move into your future home before qualifying for a home mortgage.  Programs vary, but typically a lump sum up-front payment and/or a portion of your monthly rent can go toward the purchase of your home.  Meanwhile, you can build credit for home mortgage qualification. Once your credit is on firmer ground, you can secure your home mortgage.

At Strong Blocks, we offer a 21 month rent-to-own program to help you build your credit for a home mortgage and accomplish your dreams.  Answer the pre-qualification questions to start your journey and build your Buying Plan today.

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