With good credit you can buy anything, or almost. With good credit you can buy the house of your dreams a bigger house in a better location on a nicer lot. The problem, of course, is what to do when our credit is not quite what it should be. Today, being credit challenged does not usually mean you can’t get financing. There is undoubtedly a lender out there somewhere who has a loan for everyone. However, the worse your credit, the higher the interest rate, the more cash you must come up with and the lower the LTV (loan-to-value-ratio of the loan to the value of the property). All of which is to say that your ability to afford the home of your dreams, with credit problems, is greatly diminished. However, there are legitimate ways to improve your credit. Here are 12 techniques that will help both in the long term and in the short run.

Technique 1 Change Your Attitude

Many people are surprised to learn that even a few late payments can seriously affect their ability to get real estate financing. The attitude, “I’ll pay when I’m good and ready,” may sound defiant against a creditor whom you dislike, but when those late payments show up on your credit report, your future mortgage lender wonders if you’ll say the same thing to it.

If you’re behind in payments, catch up before applying for the mortgage. Try to stay caught up for at least a year before applying so your delinquencies will show up as old rather than recent. Old delinquencies are much easier to forgive.

Technique 2 Verify Your Credit

There are three national credit bureaus: Experion, Transunion, and Equifax. They contain input from many other smaller credit reporting agencies around the country. If you’ve paid your bills on time, that will show up on this report. And if you haven’t paid bills on time and have other problems, that will show up as well. Mortgage lenders regularly order a “three-bureau” report, which sends them your credit from all three. Which is to say, you can’t hide bad credit. Therefore, before you apply for a mortgage, probably before you begin house hunting, order a credit report on yourself. (You can do it online; see Online Resources at the back of this article.) If you find that there are errors, correct them. The credit bureaus will tell you how. If there are problems, see if they can be fixed (see below).

Technique 3 Check Your FICO Score

FICO stands for Fair Isaac and is an independent company that evaluates credit reports by assigning the borrower a numerical rating roughly between 300 and 900. Virtually all lenders use the FICO score. Typically if you score in the high 600s, or higher, you’ll get the best financing. Score lower and the financing goes downhill. You can check your FICO score online (see Online Resources at the back of this article) as well as get useful hints on improving it.

Components of Your FICO Score

 Timely repayment of debt (deduct for slow/no payments)  Foreclosures/bankruptcies (deduct big)

How much you currently owe (the less the better in relation to how much credit you have no more than 50 percent on any credit line is good.)  Your recent applications for credit (more than three in the last six months could be trouble)  How long you’ve had your credit cards (the longer over 10 years the better)  Your money management (your history of borrowing wisely)

Technique 4 Improve Your Income/Expense Ratio

You shouldn’t fudge, but how you express your income can make a difference. When filling out a mortgage application it usually pays to emphasize length and continuity. For example, you’re a teacher who has gotten his first job in years just a month ago. The lender is bound to wonder if you will succeed at the work. However, if you note that you were a teacher with nine years experience a decade ago before leaving the field to help raise children, it can help put your application in a whole new and better light. The lender may be inclined to now count all of your new income instead of just a portion of it.

Technique 5 If You’re Self-Employed, Try No-Doc/Low-Doc Loans

How you receive your income is important, too. If you work for an employer and receive wages (meaning a W-2 form at the end of the year), you get preference mainly because it is easy to verify your income and because, presumably, you have something called “job security.” On the other hand, if you’re self-employed, you may be turned down. Usually, at minimum you will be asked to produce the last two years of 1040 tax forms. However, in some cases of self-employed individuals, this may not tell the whole story, or you may have been in business for less than two years. In these cases, ask a mortgage broker about the various no-documentation and low-documentation mortgages out there. You may be able to get the loan based on other factors such as your veracity, money in your account, bank recommendation, and so on.

Technique 6 Pay Off ExcessDebt

In calculating how a big a monthly payment/mortgage to give you, lenders take into account your available income. However, the more debt you currently have, the less income is available to pay the new mortgage. Therefore, when possible, pay off as much of your shortterm (such as from credit cards) debt as possible. That way you increase your income (less is set aside to pay for the short-term debt) and you may have a better chance of qualifying. There is a downside to this, however. The more debt you pay off, the less cash you’ll have available for a down payment and closing costs. It’s really a balancing act.

Technique 7 Put More Money Down

I’ve emphasized in this article that low-down financing is readily available today 10 percent down, 5 percent down, nothing-down, 103 percent financing. However, to get this requires increasingly better credit. On the other hand, if your credit isn’t wonderful, then you can still get a good low-interest-rate loan if you’re able to increase your down payment. Put down 20 percent and lenders will love you. Put down 30 percent, and you should be able to get an equity loan from a lender no matter how bad your credit may be!

Technique 8 Borrow Early for the Down Payment and Closing Costs

Ideally your down payment and closing costs will come from your own funds, earned over the years and set aside as savings. Borrowing the down payment can be a problem. Borrowing the down suggests to the lender that you really can’t afford the property. Let the lender know you’re borrowing your down payment and you almost certainly will be scuttling the loan. Therefore, if you need to borrow money that you intend to use as part of the down payment, do it well in advance of applying for the mortgage (at least six months). That way the money will be seen as part of a savings account and the loan will be long established. In other words, you won’t be borrowing specifically to make the home purchase. Gifts for the down payment from relatives also are acceptable today. These must, however, be legitimate gifts. They can’t be given with strings attached, such as you’ll repay them so much a month and when you sell the property you’ll repay the balance in full. In that case they are nothing more than a disguised loan.

Technique 9 Hang onto Old Credit Card Accounts

Lenders want to know that you’ve been successfully borrowing for a long time. That tells them that you’re a good money manager. To determine this they look at your oldest trade lines (credit cards). The older the better. I’ve had credit cards for over 20 years. When I recently applied for credit, it was noted that I didn’t have long-term cards. Long term meant 30 years or more! Hang onto your old credit cards. Keep a credit card that you’ve had for years, even if a new credit company offers you a somewhat better deal. That old credit card shows that you have a long history and may help you get your mortgage. This is the case even if you just keep the card in a box and almost never use it!

Technique 10 Don’t Have Too Much Credit

Generally speaking, if you apply for credit more than three times within a six-month period, it’s likely to be a mark against you. (Yes, it’s irrational!) To a lender it looks suspiciously like you may be planning to borrow a lot of money and leave the country. A good balance between credit cards, car loans, personal finance companies, and other installment loans is best. You don’t want a lot of any of these or even a huge total. But the fact that you’ve got a car loan, three credit cards (a good number), and perhaps a department store card and you’ve maintained reasonable balances all suggests you’re a good credit manager. And that’s what the lenders actually want the most. By the way, don’t go to the limit in your credit card charges. It’s probably better if you owe half your limit on two cards, rather than your entire limit on one.

Technique 11 Get Bad

Credit Fixed

It’s a mistaken belief that you can have all bad credit “fixed.” Companies that offer to fix or make any credit problem simply disappear, particularly if they charge you a hefty fee for doing it, may be nothing more than scams. On the other hand, some types of bad credit can be remedied, either by doing it yourself, or by hiring a company to do it for you. Some of the bad credit that can be fixed includes:

Fixable Bad Credit

 The wrong name, address, social security number, and/or employer  A creditor’s error in reporting a late payment that you made or a continuing loan that you paid off  A foreclosure that didn’t occur or a bankruptcy that never happened You get the idea. Mistakes and errors can be corrected. But it takes time and effort to do so.

Technique 12 Explain a Problem

If you have a credit problem that can’t be fixed, give a logical and coherent explanation for it. If your explanation shows that you at least tried to solve the problem and, perhaps even more important, that the problem was isolated and isn’t likely to happen again, you may very well be able to get the financing you want.

The best way to do this is to be up front with the lender. Don’t wait for the problem to surface as part of your credit report. Get it out in the open. And provide the lender with a clearly written letter of explanation. If you have late payments because you were ill, but are now well, tell that to the lender. If you were out of work because of a recession, but have now been employed steadily for several years and have paid back your credit problems, explain it. If you had a foreclosure, explain how it occurred and why circumstances are different now.