Having bad credit is one of the leading causes of being turned down for a mortgage. Lenders must do their due diligence to ensure that a borrower is creditworthy, and bad credit is a serious red flag. While credit mismanagement can be a reason, very often, bad credit stems from circumstances beyond someone’s control, such as the loss of a job or medical reasons. For many potential home buyers, bad credit prevents them from ever achieving the American dream.

What is Considered Bad Credit?

The term “bad credit” is used when a person has significant delinquencies (past or present) in their credit file, which lowers their credit score. Mortgage lenders rely heavily on credit scores to determine a borrower’s likelihood to repay the loan. Credit scores range from 300 to 850. Although there are exceptions, such as how much equity is in the home at the time of borrowing the money, typically, a person who has a credit score lower than 600 will find it difficult to be approved, or they may have to pay a much higher interest rate.

Begin the Restoration Process

Restoring credit begins with reviewing the credit file from all three credit reporting agencies: Equifax, Experian and Transunion. Free access is available, annually. Being denied credit or adverse action taken by a creditor is another way to receive a free copy, as long as the denial or adverse action is within 30 days. Carefully check all the information being reported to ensure that it’s accurate. There may be errors or outdated information that can easily be resolved by filing a dispute with the respective credit agency – not the creditor. Once all disputes are completed, an updated copy should be granted, and if not, request one.

Put It in Writing

Credit reporting agencies allow consumers to add statements to their credit file. Provide a summary to explain why the delinquency occurred and what’s being done to resolve it. Most reputable lenders will review the statements, even if the application does not meet their credit score criteria. The lender may ask an applicant to elaborate by writing a detailed letter. The letter should be factual, concise and contrite. This is the moment to provide as much information as possible, including any supporting documentation for the delinquency. If the delinquency is due to credit mismanagement or bad decisions, do not hesitate to say so. But explain what has been done to correct the behavior and why it won’t happen again in the future. A good example is credit counseling.

Excecute an Action Plan

It sounds simple, but a major part of restoring credit is to begin paying creditors on time. A credit file includes a combination of data related to the following:

• Payment History
• Current Credit Obligations
• Credit History Length
• Diversification of Creditors
• Recent Activity

Payment history makes up 35 percent of the credit file. Although paying more to creditors is ideal, paying the minimum each month is absolutely vital for a successful outcome. Make automatic payments, or schedule them in advance. Delinquent payments remain on a credit file for seven years, but paying on time for as little as six months may begin to slowly improve a credit score.

Do not under any circumstances apply for credit during this time. Although credit inquiries only make up 10 percent of a credit file, an inquiry sends the wrong message to the mortgage lender. And too many inquiries may be a reason for denial. It may be tempting to close a very old account. However, maintaining an old account that is in good standing has a favorable impact, especially when the goal is restoring credit. Lastly, reduce your spending on credit cards, and use cash whenever possible.

Make Payment Arrangements

If any collections are being reported, either pay them off or make payment arrangements. Include a statement on the credit file, indicating the agreement, and retain all documents. Collections are usually required to be paid in full before closing; however, payment arrangements show the mortgage lender that there is an end in sight, and they may be willing to work with a borrower. Additionally, under the Fair Debt Collection Practice Act, a medical debt collection may be eligible for removal if it is fully paid or settled by the responsible insurance company within the required 180-day consumer notification period. Therefore, be sure to dispute any such activity for this reason.

For more than two decades, Synergy Credit Services has helped consumers with credit challenges prepare for obtaining a mortgage. With an emphasis on consumer empowerment, our services provide the right road map toward homeownership. How can we help you?