Home Buyers Guide: Credit Worthiness

When you get prequalified for a mortgage loan or fill out a mortgage application, lenders will ask for permission to pull your credit reports — and they’ll take a look at your credit score. Even if they may take the middle highest score it’s still a great idea to make sure all three reflect the same information as closely as possible.

What goes into your credit file?

Your credit history summarizes how much money you owe, how long you’ve owed it and whether or not you pay on time.

Your credit score is based on your credit history. It’s a three-digit number that identifies you to lenders as having excellent, good, fair, poor or bad credit. A credit score of 740 or higher would help you qualify for the best terms and rates. A credit score around 640 can help many first-time home buyers qualify for certain programs. A credit score around 580 can help you qualify for an FHA loan.

Better-spending recommends apply on if your(and spouses) score is above 700 for the better rates.

-Jem Volo

You can easily obtain free copies of your credit history — and get a free look at your credit scores — without signing up for any ongoing service.

Where to get a copy?

Once every twelve months, the three reporting agencies (Equifax, Experian, and TransUnion) are legally required to provide you with your complete credit reports for free. You can obtain them all by visiting annualcreditreport.com .

Once you obtain your reports, read them carefully. The website includes instructions on how to work with the reporting agencies to correct any errors.

While the free credit reports do not include your credit score, you can easily obtain it by visiting freecreditscore.com . This is a free, no-obligation service offered by Experian. Another helpful site is creditkarma.com. Although, the TransUnion and Equifax score offered on this site are actually based on the vantage 3.0 scoring model as apposed to FICO’s, still, very accurate.

What are lenders looking for?

A strong credit history and high credit score means you will be an attractive customer for mortgage lenders. You’ll have more options and a better chance of getting the lowest possible interest rate.

But if your credit history is less than stellar — don’t lose heart. If you’re a first-time home buyer with a low credit score, you may still qualify for special programs. Plus, your lender can help you understand how to improve your credit score, over time, with better money habits and even special credit builder loans.

Better-spending recommendations

  • Pay strong attention to your debt to income ratio. Bank underwriters will scrutinize all factors of your finances but keep this figure low will give you a leg up.
  • Do not apply for anything 12 mo before applying for a mortgage. lenders don’t want to see that you are trying to take on more debt just before massive mortgage.
  • Pay off all high interest revolving debt. Keep your balance on all credit cards at or below 9% utilization. ** credit limit increases on cards can certainly help this figure, it doesn’t hurt to ask!
  • Dispute erroneous addresses- Having old addresses on your report doesn’t hurt your report, but make sure the ones listed are consistent on all three reports.
  • Keep Student loans current– Better-spending recommends paying off student loans before buying your first property. Yet, we are also realists, student loan debt is outrageous and at times prohibitive. Banks don’t usually factor in student loans amounts owed when issuing loans, but they do care if you are being responsible and paying on time.
  • Auto loans – Absolutely NO. No outstanding auto loans, finish paying it off, or sell it. No auto leases either. Be serious, banks do not want to issue large loans to people who a carrying an unnecessary debt. Get a cash car, then go get your dream home, then get a car once you’ve adapted to your new financial landscape.

Wrap up

The credit portion of the home buying process is you financial resume. This is what the Banks and lenders will use to determine if you a re fit for the financial job of home ownership. Getting this part of the process right could make or break your home buying power in the near future. So, take the time to address all these aspects so there are no surprises when its time to finally look.

Stick around for our next segment where we discuss: The Down Payment!

Published by jemvolition

Freelance Writer/Author

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