10 things you should know about credit before buying a home.
Homeownership is still the bedrock of a strong financial future, with more than 64% of Americans owning their own home now and many more to come thanks to record-low interest rates. But no matter who you are, how much money you’ve saved, and whether you’re buying your first home or downsizing in retirement, your credit score is fundamental to qualifying for a mortgage.
Here are 10 things that you should know about credit before applying for a loan and buying a house!
It is possible to rehabilitate your credit and improve your score, but it doesn’t happen overnight. So, it’s recommended that you sit down with a mortgage broker or lender about one year before you’re looking to qualify for a loan and buy a home, or at least six months out. As you get closer, the mortgage lender will also collect your financial documents and issue a pre-qualification or preapproval letter, which you’ll need in-hand to go house hunting!
When you first access your credit report, it’s a good idea to go over it line by line, looking for errors, outdated information, or outright fraud. In fact, 4 out of 10 credit reports now contain some sort of error, and even incorrect spellings, addresses, or dates can affect your credit score. Even more troublesome, 1 in 3 Americans are expected to be a victim of identity theft, fraud, or data hacking this year, so reviewing your credit and identifying these issues is crucial (whether you’re buying a home or not!).
So, what should you do if you see a missed payment on your credit report that you know was paid on time, they list an account that isn’t yours, or any other reporting snafu? Thankfully, there’s a legal process in place to hold the credit bureaus accountable for the information they disseminate, protecting consumers. It starts with a process of filing a dispute with the individual credit bureaus for the items that are incorrect or erroneous. Once they receive your formal dispute request, they’ll have 30 days to produce evidence or confirm the information they’re reporting. If they cannot or don’t get back to you in time, then the item in question is removed or amended on your report! This process is free and can be conducted directly with the credit bureaus or with the help of a mortgage adviser or legitimate third-party credit repair firm.
Remember that we don’t have just one credit score, but three different scores with the major credit bureaus, Equifax, TransUnion, and Experian. But each of these reports may differ, and that means your score can also vary wildly. If you want to qualify for a home loan, you should make sure that all three scores are correct, updated, and reasonably consistent because the banks and lenders will look at all three.
The most important factor that goes into your credit score calculation is paying your bills on time. In fact, payment history makes up 35% of FICO’s calculation, so make sure to send in or hit click on all of your monthly payments ahead of time whether they’re for your credit cards, car loans, student loans or more – and verify that the payment was received!
The credit bureaus don’t just want to know how much you owe on your credit cards and other accounts, but how much you’re borrowing compared to your total available account balance, a metric called Utilization Ratio. For instance, if you owe $3,000 on a credit card with a $3,000 limit, you’re “maxed out.” But that same $3,000 balance on a card with a $10,000 limit means you have a utilization of only 30%. Generally, a utilization of 30% or less is seen as favorable, and paying your debts down until you only owe 10% will really help increase your score!
The length of time you’ve held certain accounts (Credit History) makes up 15% of your score, your mix of different types of loans (10%), and your new credit (10%) all play a part in FICO’s credit scoring algorithm.
There are other strategies you can employ to increase your credit score in short order, such as becoming an authorized user on someone else’s account, applying for a “secured” credit card (here is a list of secured credit card providers https://www.creditkarma.com/credit-cards/secured-credit-cards), paying down your debt, requesting a credit line increase, adding favorable accounts (like rent, cell phones, etc.) that weren’t reporting before, and even a rapid re-score to facilitate the score change. In fact, Experian recently launch “Experian Boost” which will show non-traditional trade-lines such as cell phone bills, utility bills, etc. on your Experian credit report and increase your score! Check out Experian’s website for more details. However, you shouldn’t try these without the counsel of your mortgage broker or credit repair expert because they could backfire!
Sure, having a credit score in the 700 or 800s is ideal when you go to apply for a home loan and buy a house, but it’s not absolutely necessary. In fact, there are different loan programs for different people, including those who are buying their first home or have less-than-ideal credit scores. FHA (Federal Housing Authority) loans are a great tool for first-time homebuyers, with their low down payment requirements and ability to fund loans even if you have a credit score of 580 or above (although there are additional requirements and stipulations). VA home loans are also more flexible on credit score requirements for eligible veterans.
Remember that it’s also possible to buy your home now with a “starter” loan program and then refinance into a better mortgage once your credit score and home equity rise.
Why not get started now? The prequalification process is free and easy. Just give me a call at 207-321-5307 or click “Apply Now” to get started!