The McPherson Group

 

Once you have made the decision to buy a home the next step is to secure financing. Securing financing, before you find the house you want to buy, makes the buying process much simpler because you can put an offer in immediately after you find that dream home.

Getting financing requires that you meet with a mortgage broker or loan officer. They will run your credit and then assess your credit report. From your report they will be able to tell you how much you can afford to spend on a house and how much interest you would have to pay for the loan. Although it may seem unfair, your loan amount and interest percent will be based primarily on your credit scores. Therefore, it is crucial that you understand what your credit score means, how it is calculated and how you can improve it.

What is a Credit Score?

Your credit score (also called a FICO score) is a number between 300 and 850 and it helps lenders evaluate how much of a credit risk you are. The lower the number, the harder it will be to get financing. Typically a credit score of around 650 is sufficient to get a home loan. Scores in the lower 600’s are manageable but since loan officers see you as a higher risk, they will charge a higher interest rate on the money you borrow. There are three major credit bureaus and you will get a different score from each. Lenders usually take the median score or the average of the three scores when considering your loan.

How is My Credit Score Found?

There is no definitive formula for finding out what your credit score is. In fact, each of the three major credit bureaus uses a different method. Some things that affect your rating are recent account activity, debts, the amount of time you have had credit, any unpaid accounts, and how well you are paying off your debts. Keep in mind that your sex, age, and income have NO effect on your credit scores.

Your credit history is probably the most important factor contributing to your score because it often makes up more than 30% of you final rating. The things that will count against you most include late payments, loan defaults, unpaid taxes, bankruptcies, and any other monetary responsibilities that you have defaulted on.

Your current debt contributes up to 30% of your credit score. This is an important judgment because it tells lenders if you have a lot of debt and are financially stretched thin or if you have recently borrowed a lot of money, maybe for a new car, and won’t have the ability to take on more loans.

How long you have been building credit accounts for up to 15% of your score. The more credit history you have, the more your credit reports will actually reflect your ability to pay debt. Paying off your debts for 1 year is a lot less substantial than if you have been consistently paying your bills for 10 years.

The types of credit you have are the last substantial contributor to your credit score. Lenders like to see that you can handle different types of payments such as regular bills as well as a loan payment each month. Having a couple credit cards can also increase you credit score because it demonstrates extra responsibility. Please be aware however that if you are looking to buy a house in the near future DO NOT go buy a new car. In the long term the car loan will build your credibility, but in the short term it will make lenders unsure if you can handle more debt, they will question if you are serious about paying a mortgage, and they will think you are at risk for overextending your credit. Check with your mortgage broker if you should open additional credit lines.

How Can I Improve My Credit?

Pay Your Bills On Time! This is the easiest way to improve your credit score. Consistently paying your debts when they are due will show lenders that you take debt seriously and that you are responsible. Paying on time also saves your from having late fees and other penalties that will make paying debts in the future harder. Starting to pay your bills on time won’t correct a bad credit score for the first few months, but getting in the habit of paying on time will help greatly when you need financing for a house down the road.

Pay Down Your Debts! Having large debts will not make you an attractive borrower. It is best to never carry a debt of more than 50% of your credit limit. This means that if you a have a $5,000 limit, you should carry a monthly balance under $2,500. If it is possible you should pay your credit bill in full each month.

Be Careful of Inquiries on Your Credit! When applying for checking accounts, new jobs or any type of loan, your credit may get run. This will have to be done with your permission but if you don’t allow it you may not get what you need. Infrequent inquires will not hurt your credit score, but multiple inquiries in a short time makes it look as if you are applying for lots of credit or that you have been denied by other lenders, which will lower your score. If you are looking for a home loan it is okay to get up to three reports done by different lenders as long as they are within a month of each other. These inquiries would be lumped together and only be counted as one inquiry.

Be Careful of Credit You Don’t Use! It is all too common that consumers open credit lines for specific stores and then forget that they have them or don’t pay off the small amount of debt they have on them. Get rid of these cards because having credit cards that you don’t use makes more credit available to you and makes you look like a higher risk.

Credit Bureaus

As a consumer you have the right to a free credit report, from each credit bureau, every year. This allows you to check its accuracy and dispute anything that is incorrect on the reports. The three largest credit bureaus are Equifax, TransUnion, and Experian and you can access your credit report on their websites. Review your report and dispute any mistakes to the credit bureaus immediately. This is best done with a dispute letter, which the credit bureau must investigate within 1 month of receiving.

Equifax Credit Information Services, Inc
Address: P.O. Box 740241
Atlanta, GA 30374
Telephone: 1-888-766-0008
Online: www.equifax.com

TransUnion LLC Consumer Disclosure Center
Address: P.O. Box 1000
Chester, PA 19022
Telephone: 1-800-888-4213
Online: www.tuc.com

Experian National Consumer Assistance Center
Address: PO Box 2002
Allen, TX 75013
Telephone: 1-888-397-3742
Online: www.experian.com

Unsurprisingly, having good credit makes you credible. You must prove to lenders that you are financially responsible before anyone will take a chance and loan you money. Get in the habit of keeping your credit balance below 50% of the limit and paying your bills on time. These things are absolutely crucial if you plan on owning your own home one day.

As mentioned above, someone with lower credit scores can get a loan but the terms of the loan will vary from someone with good credit. We have mortgage brokers that we work with regularly from Wachovia bank, one of the biggest lending companies in the nation. They have many creative financing options for people with less than perfect credit and they are more willing to make ‘higher risk’ loans because of their size and financial security. Contact us if you would like to have one of our loan officers contact you to discuss your loan options.