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Establishing credit in order to invest in real estate

 
 
Reply Thu 12 Feb, 2009 01:10 pm
I seem to recall in books that I once read on this that if you haven't got much of a credit record, or none at all, you should get a couple of credit cards and start using them, and after about six months of doing this you should be set. But I can't remember if you should pay the whole thing off every month or if you have to leave a balance on the cards as you keep using them in order to build up credit. Does anyone know?

Thanks.
 
DrewDad
 
  1  
Reply Thu 12 Feb, 2009 01:13 pm
@kickycan,
Pay it off every month.
DrewDad
 
  2  
Reply Thu 12 Feb, 2009 01:14 pm
@DrewDad,
Part of your credit score is determined by the ratio of your balance to your credit. (Balance/credit line)

(High ratio = bad)
kickycan
 
  1  
Reply Thu 12 Feb, 2009 01:20 pm
@DrewDad,
Thanks for the info. I've always had only one credit card and have always paid the complete balance off each month. It's never been much more than about $200 though. Now I have three because I'm trying to build some more credit up for a real estate purchase (hopefully) sometime later this year. I've started out paying them all off, so I guess I should keep doing that then. Right?
JPB
 
  1  
Reply Thu 12 Feb, 2009 01:21 pm
@kickycan,
Another easy way to establish good credit is to buy something you really, really, really want when it is offered under a " ___ months same as cash" program. Say you get a new refrigerator financed as 6 months same as cash. You'll get a statement every month that says you don't owe anything. Pay off 1/5 of it each month anyway (one fractional part less than the number of months same as cash). That way by the end of 6 months you've paid it off completely and avoided any interest charges as well as establishing yourself as a good credit risk. Just make sure you pay it off a least one month before the "same as cash" period closes out or you end up getting an interest bill for the entire six months.
0 Replies
 
Linkat
 
  1  
Reply Thu 12 Feb, 2009 01:56 pm
@kickycan,
You need to use the credit cards.

Your credit will also be helped if you don't charge much on them - like if you have $1k balance, charge about $100. And definately pay them off in full - it helps your credit. I think you may be confused on the fact that you need to use them monthly - not about leaving a balance on them.

Also, helpful is having a revolving type of debt, like a car loan.

Having multiple credit cards lowers your score.
DrewDad
 
  1  
Reply Thu 12 Feb, 2009 01:57 pm
@kickycan,
Suggestion:

Pull your credit history. This will tell you if there's some forgotten debt lingering that's pulling down your score. Get your report from all three credit bureaus. (You're allowed to pull your own credit once a year for free.)

For a real estate purchase, they'll examine you credit score, along with your income to make sure you can afford the monthly payment.
0 Replies
 
hamburger
 
  1  
Reply Thu 12 Feb, 2009 02:31 pm
@kickycan,
btw i heard on CNBC that cancelling a credit card will effect your credit score negatively .
hbg
DrewDad
 
  1  
Reply Thu 12 Feb, 2009 02:53 pm
@hamburger,
Depends on the credit card, and your over-all credit status.

Credit score is partially based on how long you've held a credit card; if you cancel a card you've had for a long time it can affect you.

Similarly, it can affect you if it bumps your credit utilization (total debt vs. total credit) too high.
0 Replies
 
Robert Gentel
 
  1  
Reply Thu 12 Feb, 2009 03:03 pm
@Linkat,
Linkat wrote:
Also, helpful is having a revolving type of debt, like a car loan.


My understanding is that a car loan is not considered a revolving debt, and that revolving debt is used to refer to open lines of credit like credit cards.
Linkat
 
  1  
Reply Thu 12 Feb, 2009 04:23 pm
@Robert Gentel,
Oops I might have called it the wrong type - but a loan like a car loan where you need to make monthly payments - can't remember the exact name.
Robert Gentel
 
  1  
Reply Thu 12 Feb, 2009 04:36 pm
@Linkat,
I think I remember it being called an "installment loan" or somesuch.
0 Replies
 
Green Witch
 
  1  
Reply Thu 12 Feb, 2009 04:57 pm
@kickycan,
Talk to a bank. Find out what they want. Make sure to ask about deals for first time home buyers. Put down as much as possible. If you put down enough you don't need an outstanding credit history. Have you run a free credit report to find out your FICO score?
cicerone imposter
 
  1  
Reply Thu 12 Feb, 2009 07:20 pm
kicky, Try to find out what your FICO score is. Anything over 600 is supposed to be good enough to take out a loan.
Slappy Doo Hoo
 
  1  
Reply Fri 13 Feb, 2009 07:24 am
Ok, pay attention, I actually know what I'm talking about here:

100%, definitely, you need more than credit card history on your credit report. Assuming you have zero credit, no student loans, car loans, ect., you're going to have to get something bigger on there. Still do it though. Get 2 credit cards, ring up a balance, pay them off over a couple months, and repeat. Keep pushing the companies for higher limits too. The ratio of your balance vs. available credit has a huge effect on your score.

Your best bet on top of the cards, is to secure the largest personal loan you can right now. Pay it off over a few months, then go back to the bank and request a larger one. Even if you have to secure them, or get a cosigner for your first, make sure your ass gets them. You might have to start small, $500 or so, depending on if you have any history at all.

Here's why: lenders look at more than just a credit score on your report. So if you hit a 700 score, but your history is just 1-2 credit cards for a short time, you're still a 'ghost,' with a very limited credit background. Which, it'll be tough to get a high score with just a couple cards in a short time anyway. And lenders look for more than just credit cards, they want to see that you've paid off actual loans.

Which is why I don't know if less than one year of doing this will get you a mortgage, I would think relying on just the credit card trick, no way. Your down payment is going to be a big factor too. 25% will make things a lot easier vs. doing a 2.5% loan I'm sure. But you have to have real 'loans' on there vs. just credit cards. Good luck, and DO IT.

Slappy Doo Hoo
 
  1  
Reply Fri 13 Feb, 2009 07:26 am
@cicerone imposter,
CI, the lenders have tightened up. 600 is a pretty dismal score, and they look at more than just the number. 600 could be someone who had a lot of good credit but are currently past due, or it could be someone who just opened a credit card as their first piece of credit. That being said, they still do have score thresholds for approvals, and rate tiers...
Slappy Doo Hoo
 
  1  
Reply Fri 13 Feb, 2009 07:28 am
@Green Witch,
This too...get with a mortgage broker, and find out what is the minimum history/score the lender needs with your amount down. A lot down does make a huge difference, but I still don't know about zero credit history...but I'm not a mortgage broker. I do know how to build credit, and have done multiple mortgages in my name.
0 Replies
 
Green Witch
 
  1  
Reply Fri 13 Feb, 2009 07:57 am
@kickycan,
Kicky, I know the times are different, but when I went for a first time mortgage in 1988 I had a similar history to yours. I had never owned a car, my parents had paid for my college, I had one credit card with a $500 limit (my request) and I had couple of years off the radar while I traveled around Europe. I did have a good history of paying rent and at the time I applied for the mortgage I probably made about what you do now. I deliberately wanted to be pre-approved in case I found something and wanted to close fast (you know how the NYC market is, although now is a good time to buy). I had no trouble getting an approval based on my history, but also because I could put down 20% of the approval amount. The big difference at the time was price. I could get something very nice for $200,000. Not so sure what the same apartment would go for today, probably twice that. I think you should start by talking to a bank or reputable mortgage broker. You might also want to look into the foreclosure market. You can pay a small fee and see local listings at Foreclosure Dot Com.
0 Replies
 
cicerone imposter
 
  1  
Reply Fri 13 Feb, 2009 11:16 am
@Slappy Doo Hoo,
Thanks Slappy; I know I'm behind the times on stuff like this, but we have personally had good credit for most of our married life, so we have a very good FICO score (807).
0 Replies
 
JustBrooke
 
  3  
Reply Fri 13 Feb, 2009 11:54 am
Kicky ....... I assume when you say "invest in real estate" ...you are talking about purchasing a home for yourself to live in. Which would be the best way for you to start out investing in real estate; even if you are thinking of buying , renovating, and then selling for profit.

Go find yourself an FHA conduit, and you can go with NON-traditional credit. What this means is that you can use your rental history, utilities, etc. You will need 3 tradelines done this way. You will need a clean rental history for at least 12 months. Your loan officer can help you with this. Once everything is in hand, the processor of your loan (prior to handing your file to the underwriters) will give everything to all three credit bureaus, and they in turn, will issue a new credit report showing these non-traditional tradelines, including when each one was opened up, and your pay history for each line. This will not give you a credit score. You won't need one doing it this way, though. But it does give you the credit lines for a loan through FHA. One more thing... if your lender says they will not do this kind of loan (even though it is backed by FHA) ....keep looking. Some lenders have done away with this. But there are still plenty out there, that will do them this way.

FHA has loan limits for each state and each county. You can google your state and county and you will find what your limits are. It ranges from about 271,000 for low cost areas to 625,000 for high cost areas.

New purchases require a 3.5% down payment on FHA. President Bush signed a bill doing away the Down Payment Assistance program. However, you can still use gifted funds for the dp.

Fannie Mae with no credit history will be the slow way for you to get a home. FHA the faster way. Some people think that FHA is only for low income buyers. Not so. The governments Rural Housing program sets limits on income, but not FHA.

Finding foreclosures without having to pay for a site that lists them...you can find by following these links:

(NHMS site) http://www.nhmsi.com/

(Hud Exchange) http://www.hudexchange.com/us/hudex/igate/hudex/pages/index/pages.html

***** On the hud exchange site ....click on your state on the map. It will bring up all of the counties. Click on your county. It will bring up a page of cities. Click on the city you want. Then it will bring you to page that says you must be pre-approved and asks for all kinds of information from you. DO NOT fill that out. If you do, you will have real estate agents and loan officers bugging you. It makes it look like you need to fill it out in order to continue. You DO NOT! If you scroll down towards the bottom of the page ... it has a submit button to view properties. Go ahead and hit that button and you will be able to view the properties.

Be prepared to have to do work on foreclosed homes. They are not always in the best of shape. FHA has a 203K for renovations of single family dwellings. Meaning you can borrow the money needed to repair the home at the same time you purchase the house. It's done all as one loan. Warning you though, 203K's are a bugger to do, and you are limited in the number of lenders that will do them.

Also ..if you are buying a foreclosed home, make sure you get your inspection. Here's where that can get tricky. On a foreclosed home, you are buying "as is". So in order to protect your earnest money deposit, you will be wise if you find something you really like...to get that inspection prior to putting an offer in. I know that sounds crazy to do it that way. But in reality, if the entity holding your deposit wants to keep it if you back out because the house is infested with mold, etc., they can. Not saying they would. But they CAN. It's better to lose a couple hundred for an inspection, than a couple grand of earnest money. Also make sure you get an owners policy on title insurance. A lenders policy is required. An owners policy is not. However; better safe than sorry. Just in case there are any unrecorded liens out there floating around.

One last thing. Some people think that because the home is a foreclosure, you can't ask for your closing costs to be paid when you put your offer to purchase in .. (since you are not dealing with an individual). Not true anymore. Bid low and ask for 2% (or more) concessions to pay your closing costs. You'll likely get it. They have too many houses on the books and each day that goes by, costs them money.

 

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