With the new volatility in the housing market, many homeowners and buyers are wondering how the numbers will affect them. "Good Morning America" financial contributor Mellody Hobson explains how you can survive the mortgage crisis.
With the dramatic rise in the number of foreclosures as well as the related crisis in the financial markets, will it be harder to obtain a mortgage if you do not have much credit history or you do not have a strong credit rating?
Yes, on both counts. Lenders are now going to be less and less willing to take a risk on borrowers because taking those risks during the recent housing boom has now put many lenders in financial distress. So, if you are younger with very little credit history to show a lender, it may be difficult for you to obtain a mortgage. Likewise, if you have some black marks on your credit history, you may want to try to work on improving your credit score before you leap into home ownership.
So, how can you improve your credit to make you a more appealing borrower?
First, find out what lenders know about you by ordering copies of your credit report from the big three credit agencies -- Experian, Equifax and TransUnion. You are entitled to one free report from each agency per year and can access them by visiting www.annualcreditreport.com. Keep in mind, each report may contain different information as creditors are not required to report to all three agencies, so it is important to look at each report. Your credit report not only provides basic information about you, such as your name, address, date of birth and Social Security number, but it also details your outstanding debt and available credit.
If you are looking to improve your score, you first need to dispute any errors in writing. Then, one of the easiest things to do is simply pay your bills on time as your payment history makes up one-third of your credit score. Next, as you may suspect, you need to start paying down your credit card debt.
A key component to your credit score is your credit utilization, which is the ratio of debt to available credit. A low credit utilization is a good thing because it means that while you have available credit, you do not need to use it. For example, if you have credit card limits totaling $25,000 and have credit debt of $10,000, your credit utilization is 40 percent. If you can cut that debt in half to $5,000, your credit utilization lowers to 20 percent, which will be viewed more favorably. But, do not be tempted to open new accounts in an effort to tip the scales back in your favor if you have a high amount of debt. New accounts can be bad in two ways. First, they can indicate that you are in trouble and searching for more credit and second, they will lower the average age of the accounts on your credit report.
What about would-be buyers with little or no money for a down payment? Will it be difficult for them to secure a loan?