Preparing Your Credit Score For A Home Purchase
All too often, homebuyers enter into contracts to purchase homes without first considering the condition of their credit report.
A lot of homebuyers mistakenly believe that their household income and assets are enough to qualify them for a loan and low mortgage rates, but credit reports can derail borrowers of all kinds — even those with high incomes and large bank accounts.
In general, mortgage guidelines require applicants to have acceptable FICO credit scores, as well as three open trade lines of credit which have been in use for at least twelve months, and paid as agreed.
If there are problems with your credit report or, worse, you’ve been a victim of identity theft, the worst time to uncover such issues is after you’ve already placed an offer on a home and have moved into contract.
The better approach is to review your credit well before you ever start looking for a home.
FICO Scores Are Based On Up-To-Date Information
If you know that your credit report shows plenty of well-established accounts; and, you know that you’ve had no real credit challenges in your past, it’s recommended that you check your credit at least 90 days prior to applying for a mortgage.
By contrast, if you have had credit issues, or if you have a “light” credit history, it’s advised that you check your credit at minimum 12 months prior to applying for a home loan. This is because you’ll need ample time to establish new accounts, and make corrections or adjustments well before submitting a mortgage application.
There are three main credit reporting agencies.
They are Equifax, TransUnion, and Experian. Consumers should order and review the reports from all three bureaus, because each report could contain different information or errors that may affect FICO credit scores.
FICO scores are generated based on a snapshot of information available to the bureaus as of the exact moment that a credit report is pulled. It’s vital, therefore, that the information on your credit report is accurate. This will ensure the best possible FICO score.
The Anatomy Of A FICO Score
When you apply for a mortgage, lenders pull a credit report from all three credit bureaus on you. Their decisions to lend, and the terms of your loan, depend on the result of those reports.
Lenders qualify you based on your “middle” credit score.
If your scores are 720, 740, and 750, the lender will use 740 as your FICO. If your scores are 630, 690, and 690, the lender will use 690 as your FICO.
When you apply with a spouse or co-borrower, the lender will use the lower of the two applicants’ middle credit scores.
Expect each bureau to show a different FICO for you, since each will have slightly different information about you. In all cases, though, you will need to show at least one account which has been reporting a payment history for at least six months in order for the bureaus to have enough data to calculate a score.
The FICO credit score takes into account information found in your credit report. Some parts of your credit history are more important than others and will carry more weight on your overall score.
Your FICO score is made up of the following:
- Payment History : 35% of your total score
- Total Amounts Owed : 30% of your total score
- Length of Credit History : 15% of your total score
- New Credit : 10% of your total score
- Type of Credit in Use : 10% of your total score
Based on this formula, the largest part of your credit score is derived from your payment history; and, the amount of debt you carry versus the amount of credit available to you. These two elements account for 65% of your FICO score.
To put yourself in the best position to qualify for a mortgage, then, at the best possible terms, focus on these areas first.
Pay your bills on-time whenever possible, and pay revolving credit accounts to at least 20% of your available credit limits at least 30 days prior to applying for a mortgage.
This will improve your FICO scores and mortgage loan terms measurably.
How To Correct Credit Report Errors
In the event that you find errors on your credit report, take steps to correct them as quickly as possible.
First, contact the credit bureaus about the errors, and also whichever creditors have provided the erroneous information. Under the Fair Credit Reporting Act, each of these parties is responsible for correcting inaccurate or incomplete information in your credit report.
For simplicity, disputes can be managed online. If all three bureaus report the same error, though, remember to report the error to all three bureaus. Equifax, Experian, and TransUnion do not share such information with each other.
The law requires credit bureaus to investigate the items in question, usually within 30 days, unless your dispute is considered “frivolous”. Note that you may need to include copies of documents which support your position. Never send originals!
Within 45 days, the credit bureaus will notify you with the results of the investigation.
Then, you’ll want to obtain a new copy of your credit report in order to make sure that the errors have been corrected before applying for a mortgage.
Get Today’s Live Mortgage Rates
For today’s home buyers, mortgage rates are well-below historical averages, which is helping to keep homes affordable nationwide. Even borrowers with less-than-perfect credit are getting access to today’s low rates.
Take a look at current mortgage rates now. Rates are available online at no cost, with no obligation to proceed, and with no social security number required to get started.