Written by Lori J Sanders
There are many tactics that lenders may use to help home buyers qualify for a mortgage. This is especially true for home buyers with less-than-perfect credit. If this describes you, then you may have heard of credit enhancement.
There are two main types of credit enhancement. There are credit enhancement programs that can help you clean up your credit report. Because studies show that as much as 35 percent of the information listed on the average credit report contains inaccurate information, many people who believe they have good credit are denied loans. There are now programs that help home buyers remove these discrepancies from their credit reports and improve their credit score. By working with credit specialists, many home buyers have seen their credit scores increase by 100 points or more. These programs can be beneficial, but be wary of those that charge you high fees for this service. Most programs are low cost or even free.
Another type of credit enhancement is considered a technique that helps a lender reduce its risk. It’s essentially a guarantee that the loan will be paid as agreed. This may be done by requiring additional insurance payments, adding in a third party or by using other methods to increase a person’s credit score. Credit enhancement can be any tool used to increase a person’s credit rating. Many of the tactics used are legitimate, but there are some that can cause a home buyer much headache and hassle.
Types of Credit Enhancement Strategies
Collateral is a common type of credit enhancement used for a mortgage. In fact, collateral is used for many types of loans, including car loans. Collateral means that if you default on the loan, the lender has the legal right to seize the property. So if you don’t pay your mortgage, the lender can take the home away. All mortgages require collateral. That’s why you see so many homes going through foreclosure.
Additional insurance is a common form of credit enhancement. Lenders may require extra fees or monthly premiums to ensure that they will get their money back after loaning to a risky individual.
Some lenders may use questionable methods to improve a person’s credit. They may include an unknown third party with excellent credit as a co-signer to help boost the home buyer’s credit rating.
Why Avoid Credit Enhancement
Once you add credit enhancement to a loan, it can be hard to refinance it. Other lenders can see whether or not you have used credit enhancement and many consider it a red flag. Plus, once you have it, it’s hard to remove it. Only the lender can remove it, and they often refuse to because they require that added security. A single payment to your debt consolidation mortgage is much better than making multiple payments to credit.
Discover Your Options
There are many options for homebuyers with less-than-perfect credit. Don’t resort to credit enhancement or other products that can possibly do more harm than good. And in such cases, it is better to contact some professional mortgage brokers and clarify all your concerns with them.