How Can I Improve My Credit Score - Starting Today?

FICO credit scores are important for a variety of reasons, but they are especially important for people who are planning to buy a home. So it's no surprise that one of the most common questions among home buyers is - How can I improve my credit score before buying a home?

We will answer this question in a moment. But first, let's address another important question on the subject:

What is a FICO Credit Score in the First Place?

FICO stands for Fair Isaac Corporation, and they are the folks who developed the credit scoring model that is in use today. The terms credit score and FICO score mean essentially the same thing. When you apply for a mortgage loan for a new home, the mortgage lender(s) will review your FICO score to determine how comfortable they are loaning you money.

Your credit history determines the FICO score you receive. How you have "behaved" in the past from a financial standpoint will be reflected in your credit score. You can learn more about the various factors that influence your FICO score by visiting www.myfico.com.

Many people don't realize it, but you actually have three FICO credit scores -- one for each of the three credit-reporting bureaus (Experian, TransUnion, and Equifax). Mortgage lenders will typically look at all three scores from all three bureaus to get a composite / overall score.

How Do I Obtain My FICO Score?

So now that you have a better understanding of what this score is, the next question is how you go about obtaining your credit score. As you may have surmised by surfing the web lately, there are a lot of websites with free credit report offers (with scores). But the Internet can be a scary place, as well as being helpful. Unfortunately, there are a lot of shady websites out there that harvest personal information for criminal purposes.

So the key is to get your FICO score from a trustworthy website. Here's one that we recommend:

Get your credit reports today!

Now let's move on to the next part of this discussion to answer that burning question you have -- How can I improve my FICO credit score before applying for a mortgage loan?

Tips for Improving Your Score

The key to improving your credit score is to correct whatever financial behavior led to the bad score in the first place.

For example, if your debt-to-income ratio is unfavorable, you should consider paying down some of the debt. If you can increase your income at the same time ... even better. But start by paying down some of your debt (such as credit card balances). This will give you a more favorable debt-to-income ratio, which is one of the factors lenders look at when approving people for loans.

You should also make it a point to pay all bills on time. The number of times you miss payments (such as car payments, credit card payments, etc.) will affect your FICO credit score -- as will the degree of delinquency, meaning the length of time the payments are past due.

For more tips on improving your credit score before buying a home, check out this helpful article.

======================================
Get more home buying advice at HomeBuyingInstitute.com
======================================

Subprime Mortgage Crisis Explained

by Brandon Cornett of Home Buying Institute

What is this so-called subprime mortgage crisis I keep hearing about on TV? How did it start, and how does it affect me?

These are common questions among home buyers, and with good reason. This crisis of subprime lending has had far-reaching effects. It has also made it harder for poorly qualified home buyers to obtain mortgage loans.

So let's take a closer look at the history, development and impact of the subprime mortgage crisis in the United States.

Brief History of Subprime Lending

Through the mid 90's and early 2000's, the number of subprime mortgage loans rose significantly. This was partly due to the increased competition among lender (largely from online mortgage lenders), which meant that lending institutions had to offer a wider range of mortgage products to a larger audience -- if they wanted to stay competitive, that is.

Many of these lenders began to focus almost exclusively on this type of lending practice, thus they became known as subprime lenders. They saw this as a chance to outmaneuver competitors by extending loans to borrowers that their competitors were turning away. In other words, they offered subprime mortgage loans to subprime borrowers, usually with a much higher interest rate for the borrower ... and higher profit for the lender.

As with most things in the financial world, this lending practice had an up side and a down side. The down side eventually grew into a full-blown mortgage crisis, but we will get to that soon enough.

At an annual housing policy meeting in 2004, Governor Edward Gramlich (who was a member of the Board of Governors of the Federal Reserve at that time) had the following remarks about the two sides to subprime mortgage lending.

On the down side of subprime lending:

While the basic developments in the subprime mortgage market seem positive, the relatively high delinquency rates in the subprime market do raise issues. ... For mortgage lenders the real challenge is to figure out how far to go. ... If lenders do make new loans, can conditions be designed to prevent new delinquencies and foreclosures?"

On the up side of subprime lending:

The obvious advantage of the expansion of subprime mortgage credit is the rise in credit opportunities and homeownership. Because of innovations in the prime and subprime mortgage market, nearly 9 million new homeowners are now able to live in their own homes, improve their neighborhoods, and use their homes to build wealth."

As stated, there is both a good side and a bad side to the practice of subprime mortgage lending. Yes, these types loans extended home ownership to a lot of Americans who probably could not have afforded a home otherwise. But at the same time, they were a contributing factor in the number of home foreclosures in the U.S.

At some point, you have to ask yourself: "Should people who cannot afford a home be treated differently from a lending standpoint? Or should the lenders (and the borrowers) just accept the fact that some people cannot afford to buy homes?" There is no easy answer to this question.

The Subprime Crisis Emerges

Between 2000 and 2006, the number of home foreclosures continued to rise in America. A barrage of studies and data analysis suggested a strong connection between the rise in foreclosures and the subprime mortgage lending market. As you might have guessed, the federal government raised an eyebrow and began to scrutinize the practices of subprime mortgage lenders.

The government certainly did not use the "crisis" word, since it's a surefire trigger for panic. But from 2000 onward, many economists were already talking about the subprime mortgage crisis that was headed our way.

As federal regulators have stepped up pressure and scrutiny, the banking regulators had to tighten their lending standards. We are hearing a lot about this right now, at the time of this blog post (December 2007).

The Adjustable Rate Mortgage

The adjustable-rate mortgage (ARM) loan has played a big part in the subprime mortgage crisis. To understand how, we need to briefly discuss the nature of the ARM loan. With an adjustable rate mortgage, the interest rate will eventually reset or adjust at some future point in time. This type of loan starts with a relatively lower interest rate that appeals to borrowers. But it will later reset to a likely higher interest rate -- sometimes a significantly higher interest rate.

Randall Kroszner, the current Federal Reserve Board Governor, had this to say on the connection between subprime lending, foreclosures, and ARM loans:

This guidance ... underscores that the Federal Reserve and other banking regulators expect lenders to make sure subprime borrowers not only can afford their monthly payments while the introductory rate is in effect but also after the interest rate resets."

Impact of the Mortgage Crisis

When you drop a pebble into still water, it creates a ripple that will continue traveling until it meets resistance or reverse motion. This is an apt analogy regarding the impact of the subprime mortgage crisis in the U.S. The spike in home foreclosures, and the tougher lending standards that were born from it, have had an impact on nearly all aspects of our economy.

For example, this blog post from a business financing company in Texas explains how the subprime crisis has impacted the world of business credit as well.

Being Smart About Subprime Loans

If you ever find yourself in a subprime borrowing situation, the best way to protect yourself is to understand how these things are related (adjustable mortgages, subprime lending, foreclosures, etc.). It's also wise to seek input from an unbiased financial adviser on such matters.

Of course, by the time I finish writing this history of subprime mortgage crisis, this type of lending might be legislated into extinction, thus making all of this a moot point. But until that time, I hope I've done my part to shed some light for consumers.

Who Is to Blame?

Whenever a financial crisis emerges in this country, the blame game starts immediately. So whose fault is all this? Who is to blame for the mortgage crisis that has essentially wrecked our economy? Well, we are all to blame, in one way or another. The greedy lenders are the easiest targets. The politicians who ignored warnings are second in line. And let's not forget all of those consumers who didn't read the fine print.

This article explains the triangle blame game I've just outlined:
The Mortgage Crisis of 2007: A Love Story

Attention Economists: This is obviously a simplified version of events leading up to the current mortgage lending crisis in the U.S. One could write a book about this topic, but I have no intention of doing so. This is an overview and should be treated as such. So please do not email me pointing out gaps in my history of the subprime mortgage crisis ... thanks.

Free Copy of My Credit Report

I want a totally free copy of my credit report like I hear about all the time on TV and radio. Where do I go to get my free credit report and score?

This is a common question about home buyers. And it's an excellent question to ask when buying a home, because reviewing your credit report is an important first step to the home buying process.

These days, there are literally thousands of websites online that offer free credit reports to consumers. But many of them come with some sort of catch, like maybe you have to sign up for some kind of credit monitoring service in order to get your free report. So in reality, it's not a totally free credit report is it?

If you've been frustrated by similar scenarios, or if you're just starting the research process into the world of credit, the following information will help you out. On of the ways you can get your reports and scores for free is to sign up for a free trial through a service like Credit.com. In fact, we have made this even easier by working with Credit.com to bring you the following offer on such a trial:

Editor's Choice - Credit Report from Credit.com

Get your credit reports today!

My Free Credit Report - A Consumer Scenario

Let's imagine that I'm a first-time home buyer, and I'm conducting a financial self-assessment in preparation for buying a new home. I've read some of the helpful articles on the Home Buying Institute website, so I've learned the importance of obtaining a copy of my credit report and reviewing it closely for errors.

So where do I go to get the totally free copy of my credit report I've heard so much about? Am I really entitled to a free report since I've never requested one? The answer is yes, everyone tax-paying citizen in this country is entitled to one free credit report per year. So as a first-time home buyer who has never requested my report before, I am entitled to my one free one for the year.

Now the next question. Where do I go to get a free copy of my credit report so I can review it for accuracy? Well, there are many places I can go online. In fact, that's part of the problem! Which websites can I trust, which ones are bogus, and which ones offer free reports only with some kind of catch?

I'm confused and frustrated by the whole process, but I stick with it. In my research, I eventually stumble across a website called AnnualCreditReport.com. As it turns out, this website is operated jointly by the big three credit-reporting companies -- Equifax, Experian and TransUnion. That's comforting. At least I know it's a trusted source.

And according to the website's home page, I can request a free copy of my credit report (or as they call it, a "credit file disclosure") from all three reporting companies at once. Well that's certainly convenient.

So all I have left to do is select my state from the drop-down menu, click the "request report" button, and fill out some brief information such as name, SSN, DOB, etc. It's also comforting that AnnualCreditReport.com is a secure website, a fact that they stress right up at the top of the page.

I've solved the free credit report mystery!

Now I have it all figured out, and I'm a happy camper. No more frustration, no more sketchy websites I know nothing about ... I just go to the AnnualCreditReport.com website and order the free copy of my credit report from all three reporting companies at once. It's safe, it's easy, it's the real deal ... and of course, it's free.

Related articles:

• What is a Good Credit Score in the U.S.?
• Improving Your Credit Score
• Home Buying With Bad Credit
  

How to Stop Foreclosure on Your Home

Here comes the angel of real estate doom again, talking about depressing topics during the holidays!

Last time it was credit responsibility, and this time is the subject of home foreclosures.

I don't mean to be depressing ... only realistic. Because only yesterday I was looking at the number of home foreclosures in Central Texas, and they are still staggering.

Now that's depressing!

So, in the spirit of financial responsibility, let's talk about the ways a homeowner can stop foreclosure -- in the unfortunate event that such a situation occurs.

Here's the thing. Mortgage foreclosures are at an all-time hight right now. You know that if you've been watching the news at all lately. But I would venture a guess that around 20% of those foreclosures did not have to happen ... if the homeowners had simply known their options in avoiding foreclosures.

To that end, we have just posted a whopper of a tutorial -- all 1,300 words of it -- on the Home Buying Institute website. It goes over some of the most common (and most effective) options for stopping foreclosure before it happens, and it offers a few links to some related resources on the subject.

Check out the new tutorial here:
How to Stop Foreclosure

The key to understanding your foreclosure-avoidance options is to first classify yourself in one of two ways:

1. Are my financial problems only temporary?

Or...

2. Are my financial problems more long-term?

If your problems are temporary and you will soon be "back on track" and able to pay your mortgage payments in full, then you'll have more options for avoiding foreclosure.

In this scenario, contact your mortgage lender as soon as possible and find out what your options are. Many people don't believe it, but mortgage lenders do NOT want to foreclose on homes. They are in the business of lending money -- not managing properties.

If your financial problems are more long-term, and you simply cannot afford the mortgage anymore, then you will have fewer options. In this scenario, the key is to try and sell or otherwise transfer the property / mortgage so that you can avoid foreclosure. It's not something you want on your financial record.

Check out the tutorial for more on these options:
How to Avoid Foreclosure