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Your credit is a reflection of you, like it or not. As a real estate industry professional, I have seen time and again several negative factors affecting a borrower’s ability to make a home purchase for a long time. Before buying a home, filling out that credit card application, or purchasing that car, it’s imperative that you know the five biggest mistakes you can make with your credit and how to avoid them.
1. Late payments and collections
A single late payment can affect a credit score by as much as 100 points, according to an article by CNN Money. This means that a borrower who once boasted excellent credit will see his credit score plummet, almost overnight. More specifically a late payment on a mortgage will prevent a borrower from making a home purchase for at least 12 months after the late payment is recorded, and even then, he will find quite a bit of red tape to sift through before he is eligible for a new mortgage loan. Collection accounts will continue the downward spiral of a borrower’s credit rating, and will follow him for at least 7 years, making a home purchase a difficult transaction.
A judgment is a legal filing by a creditor or debt collector against a borrower. A judge issues an order for payment that will follow a borrower on his credit report for 10 years. In some cases, judgments give a creditor the right to seize assets and funds in checking or savings accounts to secure payment on a bad debt.
Additionally, judgments will have an extremely negative impact on a borrower’s credit score, and is required to be cleared and paid in full before the borrower can purchase a new home, no matter the amount.
For those who already own property, a judgment becomes a lien against the property. A seller is unable to complete a real estate transaction with an active judgment. When judgment filings occur in a real estate transaction, the amount of the judgment is deducted from the seller’s proceeds at closing in order to transfer clear title.
3. Short Sales
Distressed homeowners (in some cases) are faced with the decision to sell their home short of what they owe in order to avoid a foreclosure. While a short sale does not come with the same negative consequence to a credit score that a foreclosure does, a short sale will negatively affect a score by about 75 – 100 points. It will normally take 2 years before the borrower is able to qualify for a new mortgage.
Chapter 7 and Chapter 13 bankruptcies can be the only option for underwater borrowers to get out from underneath a mountain of debt. However, they are a death sentence on a credit score until they are discharged, and this negative effect will normally last for up two 2 years after the discharge is complete. Borrowers in active bankruptcy will not qualify for even the most minimal of credit extensions, so it is important to discharge bankruptcies as quickly as possible to begin that 2-year climb toward home ownership.
A foreclosure will drop credit scores by as much as 200 points when complete. Having a foreclosure on a credit score can result in a deficiency judgment and a negative credit mark for 10 years after the fact. Borrowers that have experienced a foreclosure can expect to wait an average of 5 years before they will qualify for a new home loan.
Avoiding these five mistakes on your credit is much easier than you may think. Keep a budget, pay credit cards off monthly, follow up on any automatic payments, check your credit report annually and buy a home that is less expensive than what you are approved for. These simple, yet effective strategies will keep you debt free and able to navigate even the most troublesome of financial waters.
More from this Contributor:
Short Sales Vs. Foreclosures
What it Takes to Qualify for a Mortgage
Your Credit, You and a Home Loan
AOL Real Estate: How Foreclosure Affects Your Credit Score and Your Life
Mortgage Fit: Short Sale Affects Credit Score
CNN Money: 5 Ways to Destroy Your Credit