Home Buying 101 - Step Two: Know Thy Credit
December 30th, 2008 categories: Home Buying 101
This is the second in my Home Buying 101 Series, now updated for 2009.
If you answered yes to the question I posed in my first post of this series, Should You Buy? And When?, then the most important thing you can and should do for yourself is find out what lenders know about you. And almost everything they care to know is in your credit reports (Note: you might also want to type your name in Google and find out what comes up because your lender can and may do the same thing).
Why is good credit important? Your credit report is a record of all your credit transactions whenever and wherever you’ve used credit to purchase goods and services. Your credit will have a big influence on whether or not you can get a mortgage, the terms of that loan, and the interest rate. If you have good credit, you may have a much wider range of mortgage offers with lower rates.
Your credit report will also affect the rates you pay for auto and home insurance. Some employers are also running credit reports - think of it as your financial resume.
What is in your credit report? Your credit report includes your current debts, paid debts, and payment histories for credit cards, loans, medical bills, leases, anything reported to a collection agency, liens, and a bankruptcy. It will also include the number of times someone pulled your credit report, called an inquiry.
Your credit history is reported to three credit bureaus, Experian, Transunion and Equifax. Each credit bureau has a report on you and assigns a credit score, which allows you to quantify your credit in relation to other people. The tricky thing is that each bureau can have different information on you and you can therefore have different score with each one - one higher than the other. You should know what each credit bureau has in your report and what your score is with each one and your collective score.
How do you get your credit report? Under federal law, you are able to obtain a free credit report every 12 months from each of the three credit reporting bureaus. Go to AnnualCreditReport.com and fill out the appropriate information and follow the instructions on getting your credit reports. You must pay, however, for the credit scores.
How bad/good is your credit? A free credit report will give you a lot of information but it won’t tell you your score - that you have to pay for through a service like MYFico.com. Your credit score will help you compare yourself to others and show you how creditors may view you.
Credit scores range from 500 - 850. 500 is bad; 850 is great. The better your score, the better rate you are likely to get. Even if your lender is very forgiving with your credit, it is in always in your best interest to get your credit back on track. And the great thing is that your credit score is not set in stone - once you begin making payments on time, on a regular basis, stop applying for credit and correct any mistakes, your credit will begin to improve.
Your credit score is comprised of these factors:
Payment History
Amounts Owed
Length of Credit History
New Credit
Types of Credit
Here are ways you can improve your credit score over time:
Don’t spend money you don’t have. If you have a budget, stick to it.
Make the minimum payments, on time. You can begin to improve your credit rating right away by making at least the minimum payment, on time.
Pay off your accounts. If you have several accounts with small balances, try to pay them off. But don’t cancel altogether.
Understand the implications of declaring bankruptcy. Filing for bankruptcy can keep you from getting a loan for a long time, raise your interest rates, and stay on your credit record for 7-10 years.
Get help from a credit counselor.
Give it some time. If you have poor credit and can wait a year to purchase a house, then it’s better to wait. Work on your credit, clear up any mistakes, work with the collections companies, and make sure any debts you have paid off actually show up as being paid on your credit report. The wait will be worth it.
For other articles you might like:
Home Buying 101: Should you buy? And When?
How to Avoid Beer Googling Your Next Home Purchase
Another nice post. Can I just cut and paste your entire site into mine?
My only addition is try find a good mortgage person early on. Explain you’re making baby steps towards home buying, see what kind of deal you could get now, and see what you’d get with a better credit score etc. If you get the brush off because you aren’t about try and buy a home right this minute… well you know who NOT to use then.
I think a good mortgage person is very important but I think real estate agents often know the best - and the worst of them. I wouldn’t dissuade a buyer from talking to lenders early on as long as they don’t get locked into anything.
Thank You