Sunday, December 14, 2008

The Two Biggest Credit Mistakes

We've mentioned this tip before, but it is so important, we've got to post it again. Too many people are not qualifying for mortgages because they don't know this.

These are the two biggest mistakes people make regarding their credit:

-- They pay off an account and then close it. DO NOT tell anyone to do this. It will make their score go down for two reasons. 1) They have stopped the amount of time the account has been opened -- the longer an account is open, the higher the score. 2) They have lowered the amount of available credit that they have, and that raises the ratio of used credit to available credit. In addition to their score going down, they could also run the risk of having too few accounts to get a loan. Three open accounts is the minimum that underwriters are looking for these days. Less than that, and many loans get denied. Not always, but often enough.

-- They pay off old collection accounts. DO NOT tell anyone to do this. Collection accounts begin to stop hurting your score as soon as the collection company is not bugging you to pay the account. Most collection companies give up very quickly - a couple of months at most. If someone pays off an old collection account that no one is trying to collect from them, the "date of last activity" on the account will be the current date. The old collection account turns into a new collection account, and it kills the credit score. Also, neither Fannie Mae, Freddie Mac, FHA, nor VA require that collection accounts be paid off. This rule has been in effect for quite a while now, but unless you read the updates to the underwriting guidelines every day (and there are very few people who do), you might not know that.

Again, do NOT close accounts and do NOT pay off old collection accounts. You will see plenty of information online telling you this advice is incorrect, and there are plenty of mortgage brokers and retail loan officers who will tell you that it is incorrect, but that bad advice leads to loans falling apart. A deal should never fall apart once it has been pre-approved, unless the value of the property is lower than expected.

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