Know Your Credit Score to Score a New Home
When you decide you want to buy a house, what’s the first thing you should do? If you said “go house hunting,” that’s the wrong answer. The right one? Find out what your credit score is. Why is this important? Well, because your credit score will determine your interest rate, the type of loan you can qualify for, how much your monthly payment will be, and, most important—whether or not you can qualify for a loan.
The short of it is that the higher your credit score, the less you will pay over the life of the loan. And to be clear, typically with most lenders, you will need a credit score of 620 or higher to qualify for a loan. The worst scenario would be if your credit score was just high enough to qualify for a loan—but the mortgage payments and the interest rates would be outrageous, so you could well be making your financial situation go from bad to worse. Therefore, knowing your credit score BEFORE you start shopping for a new home is critical.
WHAT EXACTLY IS A CREDIT SCORE AND A CREDIT REPORT?
If you want to understand the history of credit reporting, go to www.howstuffworks.com. There, you can get a detailed explanation of how credit reporting got started way back when there were old-time general stores. Type “Credit Reports” in the search box, then look for “How Credit Reports Work.” The website has everything you’ll need to know about how your credit report works.
If you are interested in how things work today, you only have to go back to the 1980’s. That’s when credit scores came into wide use. Lenders standardized three basic decision processes by using a point system that scored several factors on a consumer’s credit report. Statistical models were then developed that measured the variables in even more detail. So now a system exists that measures your “credit-worthiness.”
And pretty much everyone—including retailers, credit card companies, and mortgage lenders—uses the credit report. Mortgage lenders, in particular, use your credit report as the first in a list of reasons to qualify or disqualify you as a borrower and to determine which lending products and programs they are able to provide you. If you want a more detailed understanding about credit reports and credit scores, go to www.truecredit.com which offers a lot of very helpful information.
IS THE CREDIT REPORTING AND SCORING SYSTEM TOTALLY FAIR AND ACCURATE?
The answer is both yes and no. Yes, because it takes personal or individual bias out of the decision. And no, because it’s based on mathematical models where the variables change every day. For example, there might be too much weight put on a bad financial event that happened recently—but not enough placed on the years of good credit history. And one model, for instance may conclude that you are a good risk for a car loan but not for a home mortgage. And to be clear, the accuracy of the information on your credit report might be questionable because the process of checking the information is not perfect.
So knowing about the possible pitfalls—and if you are a wise consumer—you’ll understand how important it is to check your credit at least once every year. Because if your credit report is incorrect or incomplete, it’s your responsibility to correct it, and that can sometimes be a long and frustrating process.
WHERE CAN YOU FIND OUT ABOUT YOUR CREDIT?
There are three national credit bureaus that provide credit reports. Here’s how to contact them:
Normally, you have to pay a fee to get your credit report. However, once a year, anyone can order a free copy of their credit reports from these credit bureaus at
WHAT KIND OF INFORMATION ABOUT YOU IMPACTS YOUR CREDIT SCORE?
Here are some main factors: how many late payments you’ve made, and how late they were; the type, number, and how long you’ve had the accounts; your total amount of debt; and how many recent inquiries or applications for credit you’ve made.
Here’s what is not taken into consideration in your credit report or score: bank account balances; race; religion; health (unless medical bills show up as debts); criminal records (unless public filings and judgements appear); income; and driving records.
ARE YOU A HIGH OR LOW SCORER?
Get your FICO credit score at www.myfico.com to find out. If yours is below 640 and you’re trying to get a mortgage, shop for a mortgage broker that works with a re-scorer. By the way, the fastest way to improve a poor score is to pay off any large credit card accounts and then ask for a re-score.
WHAT DOES YOUR SCORE INDICATE?
The higher the score, the better. Credit scores usually range from 400 on the low end to 800 and over on the high end. Here’s how a mortgage lender would interpret your score:
720 and over—you are a mortgage lender’s dream. You’ll get the best rates and terms on your mortgage.
700 to 719—you’re in excellent shape and will have no problem getting a loan.
680 to 699—you’re going to do fine, mortgage wise.
660 to 679—you’re okay.
640 to 659—you’re on the borderline. Hopefully, everything else in your financial picture is strong.
620 to 639—you are in a weak position. The rest of your financial picture must be perfect.
600 to 619—you’re in a difficult position. You will need to improve your financial situation or shop for a special program in order to get a mortgage.
Below 600—you’re in trouble. You will absolutely have to work on your credit score.
IF YOU ARE MARRIED, WILL YOUR CREDIT REPORT AND SCORE BE THE SAME AS THAT OF YOUR SPOUSE?
No. Here’s why. You are separate individuals, with separate Social Security numbers. So you will have six credit scores (3 per individual, per major credit bureau).Which means that if you plan to get a mortgage and buy a home together, and one spouse has a poor or bad credit score, it could definitely affect your chances as a couple of getting a mortgage loan.
THE GOOD NEWS: NOW IS THE TIME TO APPLY FOR A MORTGAGE LOAN.
Interest rates are at an all-time historical low right now. Many mortgage lenders have relaxed their requirements to be more competitive and may be more willing to work with you. But remember, a low credit score means your interest rate may be higher and you will pay more over the life of the loan. The best advice is to know your score before you go shopping for a new home.
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