Homework to Homeowner: How to Repair Credit Before Buying Property After Leaving School

One thing that many young people might envision as a life goal is having the ability to become a homeowner soon after they leave college, but tough economic conditions might be somewhat discouraging.

However, there is a way for young adults to put themselves in a position to own a home as long as they are conscientious, smart and prepared. While many may focus on the financial particulars of the process — buying a home is usually a very expensive process that takes years of saving to even consider — there are other aspects that need to be settled as well. But before worrying about having the money to cover a down payment of tens of thousands of dollars, they’ll first have to make sure their credit is in good enough shape to even be approved for a mortgage.

Where to start

One thing many young adults might not see as a potential hurdle to the ability to have healthy finances and a healthier credit score is debt carried on other accounts. As long as a borrower is saving even a decent amount of money every month, they might think they’re doing well managing their finances, but there’s more to preparing to buy a home than making sure one has enough in savings to cover the down payment.

The unfortunate reality for many would-be homeowners today is that lending restrictions remain tight compared with historical norms, for a number of reasons that include more stringent laws for the kinds of mortgages banks can approve. As a result, lenders don’t want to see just whether a borrower has good credit or enough money in the bank; it has to be the right combination of both, as well as a few other factors.

One of these factors is a borrower’s debt-to-income ratio. That means, essentially, how much a borrower owes across all their various accounts versus the amount they take in every month. The more they owe, the less likely a lender might be to approve a mortgage application because that may show that there are still significant balances that will also need to be addressed. Consequently, borrowers will have to take this into consideration before they do anything else.

Getting credit under control

When consumers want to tackle their credit issues and improve their credit score to the point where approval becomes far more likely, they’ll need to do a few things. First, make sure they’re current on all their payments. That means every bill has to be paid in full and on time, whether it’s for credit cards, auto financing or student loans. Second, the lower their debt versus the credit limits on their cards, the better off they will be as well, so cutting into those balances will be of the utmost importance. The closer to zero balance a borrower can get on those accounts, the better off they’ll be.

And here’s where the debt-to-income ratio comes in. Recent college graduates these days tend to have tens of thousands of dollars in outstanding student loan debts, which can not only take years or more to pay off, but also severely limit their debt-to-income ratio because they owe so much and, if they’re like many recent grads, likely don’t make a lot of money in their first job right out of school. Therefore, making conscientious efforts to reduce outstanding student loan debt in the first few years out of college can be of the utmost importance not only to securing a mortgage, but a stronger financial future as well.

Becoming financially prepared

If a borrower can get their student loan debt and other outstanding balances reduced significantly over a period of a year or more, they might have done so at the expense of their overall savings efforts, which obviously can limit the amount they have ready to go for a sizable down payment. Buying a home should be viewed as a lengthy and expensive process, and should not be entered into lightly without months or even years of preparation. Once a borrower thinks their credit and finances are both in a good enough position to successfully obtain a mortgage, they should also take the time to shop around for the best possible terms on such a loan.

However, before doing so, one last step that will help them to get the most affordable mortgage is ordering copies of their credit reports, which may help them to identify any unfair markings that might be dragging down their scores. If such an entry is discovered, working with a credit repair company may help them to clear up the issues and return their ratings to where it deserves to be.

Posted in Credit Repair
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