How to Get Out of Subprime Status

Borrowers looking to get out of subprime status should start the process far in advance of actually seeking a mortgage loan. Subprime lenders offer loans below the national prime interest rate. They can do this because they then adjust the rate to a much higher level in the future. Subprime lenders tend to be the least professional and most predatory in the businesses, so seeking prime loan is a much better option. In order to work with traditional lenders to secure a quality mortgage, begin taking these steps at least 2 years before seeking a home loan.

Pay Off High Interest Debts

You want to start paying off your debts in order to raise your credit score. However, you should not just blindly begin making debt payments. Instead, start by paying off those debts with the highest interest rates. First, this will save you in financing costs over time. Second, paying off high interest debts typically means paying off high risk debts. High risk debts have a larger affect on your credit score than low risk debts. When you pay these high risk loans off, you will see a faster boost in your credit.

Reduce Credit Card Balances

You should aim to reduce the balances on any and all of your open credit lines to under 10%. Ideally, you will reach a point where you are not carrying balances month-to-month on your open credit lines. However, this is not immediately possible for most borrowers. Getting to the 10% or less limit will protect your credit score. At this level, you will be using a small enough portion of your total credit to give you a boost in your overall credit score and make you appear as a more responsible borrower.

Close Credit Lines with Discretion

You should not simply start closing all of your credit lines in order to increase your credit score. Its true: people with too many credit cards and debts will have a lower score. On the other hand, closing these lines all at once will cause your credit to drop instead of increase. You want to keep an appropriate amount open and close only those lines with high rates and low rewards. For example, you may choose to close the credit cards you have with department stores or retailers but maintain those you have with major credit card companies and your home equity line company.

Avoid Consolidation or Refinancing

Consolidation and refinancing will rebuild your credit in the long term, but they will hinder your ability to repair your credit in the short term. If you are not seeking a mortgage loan for at least 5 years, you may consider these actions to help you pay off your existing debt faster and at a lower cost. But, if you plan on seeking a home loan, within 5 years, you should avoid any type of modification on your existing loans. Loan modification is a red flag to future lenders and may force you into subprime status instead of helping you get out of it.


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