Credit and Home Buying
Along with mortgage qualifying (which is an assessment of your ability to pay), a credit report (a record of HOW you pay) is one of the first steps on the way to mortgage loan approval. After it has been determined that your income and debt ratio fits the lender’s parameters, your credit history will have a big influence on whether or not you will be able to secure a mortgage and if you are able, on what terms and at what interest rate. (It is simply a fact of financial life that those with the best credit histories get the best mortgage plans). In addition, those with good credit will have a much wider range of available mortgage offers, meaning a better likelihood of finding a program that most closely matches their needs.
Knowing how important their credit is to the entire process, how can a home buyer take advantage of the situation?
When the mortgage lender takes a look at your credit report, you’ll want to have your best foot forward. First, you’ll want to make certain that there are no errors on the report. These can always be corrected, but may take a good bit of time, delaying the application or forcing you to get documentation correcting the error. Next, you’ll want to be certain that all positive accounts appear on your report. If a car loan or credit card account that you paid as agreed is missing from your report, it could negatively impact the application, especially if you have few or no other accounts.
In short, you’ll want to be certain that your credit report accurately and completely represents your actual credit history.
Taking a proactive approach–reviewing your credit report prior to a mortgage lender seeing it–is always a good approach. Not only can you fix any minor mistakes you find, you can also be well on your way to correcting any inaccuracies that may take a bit longer to handle. Having things in order makes the job of the mortgage lender much easier.
If you do find mistakes or omissions, your first task is to contact the creditor and have them make the change with the credit bureau. It is important here to get WRITTEN verification not only of the change in the credit account but also that the creditor will be forwarding this updated information to the credit bureaus. Not only will the change be more likely to actually happen this way, you will have documentation to share with the mortgage lender if the question arises (and it probably will).
With your credit report in hand, you’ll also want to make changes to your debt and account structure that can help you with the mortgage approval process. For example, say you have a credit card with a $7500 limit that you haven’t used in the last 3 years. If you feel reasonably sure that you’ll not be using it in the future, it makes good sense to close the account. Even though the account may have a $0 balance, a mortgage lender may look at the account as a source of potential additional debt (you could run up a $7500 balance very quickly). With the account closed, you’ll still get credit for your past payment history, but remove the ability–in the lender’s eyes–of adding to your debt load.
If you have several accounts that you are using that have small balances, try to pay them off. Current accounts with $0 balances will always look better than several with balances, even if they are small, since they will likely have minimum monthly payments attached to them. This will also help ease the qualifying process, since those minimum payments will add to your total monthly debt.
What about Credit Scores?
An additional indicator of your credit condition can be found in your credit score. This is a fairly recent development where a number of components of your credit report are analyzed and “scored” and a credit score number is generated. According to Fair, Isaacs and Company (the largest developer of credit scoring systems) the following factors are used to develop your score:
* Your payment history (your track record)
* Amounts owed (how much is too much?)
* Length of credit history (how established?)
* New credit (are you taking on more debt?)
* Types of credit used (Is it a “healthy” mix?)
There are no “right” scores nor “wrong” scores. Different loan programs may require different minimum credit scores, so if the scoring is not high enough for a particular program, there may be another available with lower requirements. Your scoring will only be one factor in the credit decision, along with the actual credit report itself, your employment history, your income, your debt-to-income
ratios and the appraisal of the home you want to buy.
Getting a copy of your credit report (even a copy of your credit score) is a much easier process than it has been in the past. Consumer protection laws, for example, dictate that if your have recently been denied credit, you are entitled to a copy of the report from the credit bureau that provided the information to the creditor that turned you down.