Know Your Credit Before You BuyMarch 9, 2016
When it comes to buying a home, your credit should be the first thing you check. It will be a major factor for home loan (mortgage) approval and terms.
What is credit?
Credit is a measure of how trustworthy or reliable you are to pay back borrowed money. Your credit score – ranging from 300 to 850 – influences the amount that’s available for you to borrow as well as the terms (interest rate, length of loan, etc.) that lenders may offer you.
The sooner we can check credit the better. — Paul Barton, Cherry Creek Mortgage Company
It’s essential that you monitor your credit often and know your score before you start looking. You can use the free Credit Karma®, but their formulas don’t translate to lending institutions. You’ll get a better idea of your score – and the ability to fix mistakes – from an identity protection company (such as PrivacyGuard® and LifeLock®) that uses numbers from the credit bureaus.
This is just a starting point. It’s important to note that mortgage lenders have different methods for calculating your credit score, so you’ll need to find that out from a lender if you’re serious about looking for a home.
“The sooner we can check credit the better,” says Paul Barton of Cherry Creek Mortgage Company in Denver. “The more time we have to rectify the situation, the better. See a lender the minute you decide you want to buy.” Ideally, Barton recommends contacting a lender 3-4 months in advance of your purchase, especially if you think you may have some issues.
Minimum scores for mortgages
Scores come from what’s reported to the credit bureaus. The three major bureaus most commonly used are TransUnion, Equifax and Experian. These scores are calculated with software developed by the Fair Isaac Corporation (FICO), so you might hear credit scores referred to as “FICO scores”. The newer VantageScore looks at recurring payments (utilities, etc.) and goes back 24 months (FICO looks back 6 months). Again, talk to a lender about the types of scores they use.
Go look at your credit report right away. Know what’s on it and what belongs to you. If you need to buy now, go talk to a lender first.
The minimum score for a Federal Housing Authority (FHA) loan is 580. Conventional and Veterans Administration (VA) loans require a higher credit score, at least 620. Bankrate® says the minimum credit score is 740 for the most competitive interest rate (depending on the lender). There are ways to get loans with lower scores, but you’ll pay a premium in interest and insurance.
Check your credit report
“Go look at your credit report right away,” advises a Redefy Contracts Manager. “Know what’s on it and what belongs to you. If you need to buy now, go talk to a lender first.”
Your credit report is different from your credit score. Your score is “a grade that’s given to your credit report,” explains Wells Fargo. The report contains information about your past and current credit accounts. It can contain mistakes, but if you look in advance, you may be able to repair those items before you apply for a home loan. You are entitled to one free credit report from the three major bureaus each year. To request the report, visit www.annualcreditreport.com.
If you’re buying now
If you need to purchase a home soon, it’s a good idea to know if you’ll be approved for a loan and for how much. Because this determines your price point. There’s no point looking at a $500K house if you’re only approved for $350K. You can get a preapproval (aka prequalification) letter from your lender if you meet their criteria.
If you need to purchase a home soon, it’s a good idea to know if you’ll be approved for a loan and for how much.
If you’re looking to buy right away with less-than-ideal credit, you could pay more in interest for your home loan. But a solid track record (minimum 90 days to 6 months) of on-time mortgage payments will allow you to refinance your home for a better rate.
If you’re buying later
If you’re planning on buying in a year or so, you have time to make some changes. You can dispute errors on your credit report and pay down balances (in the next column, we’ll address the dos and don’ts of credit repair).
Some repairs simply take time, so even if you think you’re a few years out from buying, get started now.
A pre-approval letter from a lender is the first thing you need to have before you make any offer. In a competitive market, get the letter before you start seriously looking. Why? “Sellers won’t accept an offer without a pre-approval letter in a hot market,” said Barton. “If you’re serious about buying a house, you need to show the seller you’re serious.”
This article was also published in a real estate column for the Las Vegas Tribune on behalf of Chuck Maxfield, General Manager of Redefy Las Vegas.
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