Question: “During 2007, I was working a full‑time and a part‑time job. I lost the full‑time job due to a reduction in force with the federal government. I was paying my creditors until my unemployment was revised.
“My question is this. I tried to re‑mortgage my house. I tried to get a home equity loan, but it was denied. It was suggested that I contact a subprime lender. Who are they and where are they? My credit score is low, how can I get a loan to pay creditors and up my credit score? Why don’t the lenders take the reason why your credit is in such horrible condition into account?”
Answer: There’s never been a better or more necessary time to improve your credit rating.
We’re all dealing with the ramifications of the credit crunch, and part of the reason why banks are being so particularly stingy with credit and lending at lower levels that they had been in the past, is that so many banks got burned.
There were multiple defaults on the mortgage side. Obviously we came through a period where we had the whole mortgage meltdown, and it wasn’t just on the subprime market. It was also among people who had good credit ratings as well.
In fact right now, the fastest‑growing group of consumers who are defaulting on their mortgages are so‑called prime customers, those with 700 and above FICO credit scores, who are walking away from their mortgages. Those are called “strategic defaults.”
A subprime lender, though, is one who makes loans to people with bad credit, but unfortunately those loans often have bad credit terms. There might be a pre‑payment penalty stuck into that mortgage. There might be a balloon payment stuck into that mortgage, or some other onerous terms that make it difficult.
For example, some people have subprime ARMs or adjustable rate mortgages. Essentially what that means is you might have an interest rate that’s fixed at one level today, but next year, for instance, the loan will reset or adjust upwards and be a higher rate, causing your monthly payment to increase.
I don’t know who told you to go to a subprime lender, but that wouldn’t be the approach I’d take. You need to be thankful that you actually are in a home right now. You shouldn’t trying to be trying to get a home equity loan, which I assume is in order to pay off some of your other debts.
The challenge for you is to really improve your credit rating so you can get a decent loan, the same kind of loan that would be given to anybody else with a positive and a good credit rating.
The subprime lending universe has by and large gone away in many areas and many aspects, because of financial reform and because of the whole tightening that we’ve seen among lenders, and at the federal level among organizations like Fannie Mae and Freddie Mac.
Here’s what to do to improve your credit. First of all, pay all of your bills on time. And I mean everything, on time, every single month. Even if you can only make minimum payments, do go ahead and make those payments.
Secondly, don’t close out any credit card accounts that you may have. I know you’ve probably heard that advice in the past, cut up those credit cards or close up those accounts. That can actually backfire on you and cause your credit score to drop. So don’t do that.
You also want to refrain from applying for new credit unless you really and truly need it. You know, 10% of your credit score is based on inquiries or new applications for credit. And each time you have an inquiry that pops up on your credit file, it can ding your credit rating.
And inquiry counts against you on your credit file for credit scoring purposes for one year, but that inquiry stays in your credit record for two years.
So try doing some of those things to boost your credit rating. You can also, of course, get your credit reports, free of charge, at annualcreditreport.com. Again, that’s annualcreditreport.com. You’ll be able to get your credit reports from Equifax, Transunion, and Experian.
You should check those reports to make sure that there are no mistakes. And actually consumer groups say that 70% of all credit reports do in fact have mistakes in them. So if those mistakes are also causing your credit scores to be low, you definitely want to dispute those errors and have those fixed.
The whole idea about re‑mortgaging or refinancing your home is probably something you should put off for now, until you can improve your credit rating, mainly because most banks will turn you down if you have bad credit anyway. It’s much more difficult to get a home loan in the current environment than it was just a few years ago.
I wish you the best, and I hope those tips are helpful to you.