Too many times I’ve worked with buyers who find the perfect house, only to have their hearts broken. The reason? Their credit score was too low and they couldn’t afford the home.
How often do you use cash? Is “plastic” your payment method of choice? We have become a society increasingly dependent on credit.
It’s crucial that you understand personal credit reports and your credit rating (or score). Since the mortgage crisis of 2008 having an optimum credit score is more important than ever. When purchasing a home, many buyers depend on borrowed money or a loan. That loan is essentially a promise. A credit rating determines the likelihood that you will pay back a loan without defaulting. A high credit rating indicates a high possibility of paying back the loan in its entirety without any issues; a poor credit rating suggests that you have had trouble paying back loans in the past, and might follow the same pattern in the future. Your credit rating affects your chances of being approved or receiving favorable terms for a loan. Lenders rely heavily on your FICO (Fair Isaac Corporation) score that comes from three major credit reporting agencies – Equifax, Experian and TransUnion.
So how does a lender come up with your FICO? Your credit score is based on five factors. Each factor represents a different percentage of contribution to the overall score.
Payment History 35% Have you paid your bills on time?
Current total debt 30% How much is too much?
Length of credit history 15% How old are your accounts?
Requests for new credit 10% Are you taking on more debt?
Types of credit in use 10% Is it a healthy mix?
Credit ratings are never static, in fact, they change all the time based on the newest data, and one negative debt will bring down even the best score. Credit also takes time to build up.
Because a credit score can constantly change, it’s important to know what actions can lower a credit score and ways to improve it. Paying your bills on time is the most important. Even if the debt you owe is a small amount, it is crucial that you make payments on time. Of course late payments aren’t the only factor….each of these will deduct points from a credit score:
Unpaid accounts from previous years
Too many credit cards (even if they are in good standing or not used)
Excessive potential credit (too-high limits)
Unsatisfied lien or judgment
Too many inquiries (multiple inquires within a short period for a mortgage or car purchase should only count as a single inquiry)
Maxed out credit cards (consolidating multiple cards to one or two is not a good idea if it means those cards will be at a maximum.
It is very important for borrowers with credit problems to start working on improving their credit score long before applying for a mortgage loan. The following suggestions my help before visiting with a lender:
Pay all bills slightly before the due date
Reduce number of credit cards (be sure to cancel in writing)
Refuse pre-approved applications for credit cards
Refuse increased loan limits on existing cards
Correct errors on credit reports
Unfortunately, errors occur. According to the Federal Trade Commission, about 5% of consumers have errors on their credit reports bad enough to result in a higher price for loans or insurance. This is why it’s important to check your credit report on at least an annual basis. Credit reports and FICO scores can be ordered for a fee. Because ordering multiple reports can get expensive, Congress has established an outlet for consumers to obtain a free once-a-year credit report and credit score from all three credit reporting agencies at www.annualcreditreport.com.
If something wrong, it’s important to dispute those errors with all three credit reporting agencies to get them removed. Gather documentation to prove your case, then reach out to the bureau or bureaus that show the mistaken information. All three bureaus have an online dispute process, and that is often the fastest way to fix a problem. Under most circumstances, the bureaus have to respond to a dispute claim within 30 days. If you’ve heard nothing after a month, check the status of your dispute online or call to find out what’s going on. If you don’t get a satisfactory answer, escalate your questions to the Consumer Financial Protection Bureau. You can also file a complaint with the Better Business Bureau. Its national website will direct you to the appropriate local branch office where your complaint should be filed.
Eagle Mountain Realty works with the best mortgage bankers in the business. If you’re interested in buying a home give us a call and we’ll connect you with a lender. It’s the first and most important step in buying a home.