Home buyers thinking about looking for a new dream home need to do more than dream. A successful home search starts with getting the financing needed to buy the type of house you are interested in. You can be a step ahead of the process if you know what your credit score is ahead of time and take the steps to make sure it is as good as possible. Having a good credit score will help you get the best loan rates and open up more loan programs too.
Having a good credit score can give you a better chance at getting into your new dream home without even putting down your own money. Home buyers with strong credit ratings can qualify for USDA no money down loans, or low down payment FHA mortgage loans.
The mortgage lending atmosphere is opening up again and today’s rates are lower than they have been in years. However, in order to get standard loans at a conventional lender, buyers still need excellent credit ratings to get the best interest rates.
The top lending association of banks, the Mortgage Bankers Association, expects to see $677 billion, yes billion, in mortgages to purchase homes in 2014. The housing market is wide open for buyers who have the right credit. There are more than 5 million homes expected to sell, leaving a large inventory of properties to fit the expectations of a wide range of buyers.
To prepare to make an offer on one of the many homes waiting for a new owner, home buyers can help their prospects by doing as much as they can to improve their credit scores. All home buyers need to know what influences their scores and take steps to build up their credit.
UNDERSTANDING CREDIT SCORES
Everyone of legal age has a credit score that details every single financial transaction they have made. The report includes information on loans such as auto or home loans, credit card and possible liens or bankruptcies for a pre-determined amount of time. All of the items on your report are linked by name and identification number to ensure accuracy.
Along with payment histories, defaults or judgments regarding transactions, a credit report also shows all aliases a person may have used, all addresses known to be associated with each individual as well. Most information on your credit report stays for at least seven years, although there are some accounts that will stay on your report longer, and can be permanent.
In some cases grades are assigned to a credit score ranging from AAA (triple A credit) to F. However, in more recent years the credit rating scores have moved to a numerical value ranging from 300 to 850. 850 is the highest score an individual can have. It is spotless credit and highly sought after. That doesn’t mean that a score less than 850 will keep you from getting a good interest rate, or prevent you from obtaining a mortgage loan, but there is a level that is considered too low that will do exactly that.
It is possible to get a mortgage loan with a credit score of 500 or better. However, a credit rating lower than 650 will severely affect the interest rates you will get, and what mortgage programs will approve your loan. A credit score under 500 will almost completely prevent a successful loan application with any but the most questionable lenders and highest interest rates. Having a score below 650 will also keep you from getting into the very desirable federal lending programs like the USDA or FHA loans that allow low or no money down purchases.
When buying a home in a community with a home owner’s association, it’s not just necessary to be able to buy the home, home owners need to be accepted by the association. The board of a home owner’s association is likely to check credit ratings as a part of their review process to determine if a potential buyer is a good fit for the community.
It isn’t just home buyers who are affected by a low credit rating. Even renters may find it difficult to get choice rental properties. Landlords will often check an applicant’s credit score before renting homes or apartments to them. Having the best credit score possible is an important step to making it possible to pay the lowest interest rates, get the best savings and even be accepted by landlords or property associations.
The good news is, it is possible for anyone to improve their credit scores to the highest levels. Once you understand the methods of scoring a credit agency uses, you can get an excellent rating and find the home loans you want at the rates you deserve.
THE FICO SCORING SYSTEM THAT MORTGAGE LENDERS USE
There are dozens of credit reporting companies. It is important to know that not all of your financial information may show up on every single credit report from each agency. Whether or not a transaction or payment history for an account shows up on a report depends on the lender or business sending the information, and what companies they deal with. Even though there are many credit agencies, most companies deal with three main credit reporting companies. The big three are: Equifax, Experian and TransUnion. Together, these three companies are known as the major credit bureaus.
When a lender pulls your credit report, they will look at all three of the agencies, and take your overall score from each and average them to come up with the score they will use to consider your loan. For instance, if you have a score of 650, 670 and 700 from Equifax, Experian and TransUnion respectively your lender’s credit score will reflect an overall credit rating of 673. Credit scores with a percentage overage are not rounded up, so an average of 673.333 will simply be shown as 673.
The credit scores from reporting agencies are generally known as FICO scores. The name comes from the Fair Isaac Co., the pioneer in developing the system used to calculate financial transactions and risk management. With all else being equal on your application regarding job history, income and other considerations, the higher your FICO score, the better your loan terms will be.
HOW TO INCREASE YOUR FICO SCORE
When you get your credit report, it will show your score and give you a complete listing of all accounts. On the top page you will often find credit solutions to help you improve your rating. Some of them will be basic and easy to remedy such as “balances too high” or “too many inquiries.” For those types of issues, simply pay down as many open credit accounts as you can and stop applying for new credit to keep companies from checking your score. A very important part of a credit report review is to check and make sure all of the accounts reported are actually loans or payments you have made. Report any inaccuracies immediately to the relevant bureau.
After doing what you can to improve your credit score based on recommendations from the agencies involved and checking to verify the debts reported there are several ways to make sure your score improves.
• Make timely payments on all accounts. Being late, even by a day can end up as a negative on a credit report.
• Keep credit card balances low so your debt to income ratio is as low as possible.
• Avoid applying for store credit or additional credit cards unless there are no other options.
• Pay all utility and medical bills when they are due.
• Do not close out old accounts. Use old credit cards occasionally to maintain their relevance, but keep the charged amount low so it doesn’t impact your debt ratio. A common mistake people make is to close out any old cards they no longer use.
However, that has a quick and negative impact on credit ratings, because it lowers your debt ratio. Your debt ratio is the amount of credit you have vs. how much you owe on available credit. For instance, if you have a total of $50,000 in combined credit from all credit card accounts, and you only have a total of $10,000 in debt, you still have $40,000 of available credit. However, if you have $50,000 combined credit and owe $45,000 your debt ratio is too high. You are close to, or maxed out on credit.
When you have $50,000 in open credit accounts and $10,000 in credit card debt you have a good debt to credit ratio. However, if you close several unused accounts and then only have $15,000 in available credit, that same $10,000 of credit card debt is a very high debt ratio.
When lenders look at debt to credit ratios, they prefer to see 30% maximum debt ratios. One way to increase your debt ratio quickly when you know you are going to apply for a mortgage loan is to contact creditors and ask for an increase in your credit limits. That will effectively give you a higher level of available credit, as long as you do not use it.
It can be difficult to get bad credit history removed if it is correctly reported. If you have a number of bad payment histories, charge offs on credit cards, loan defaults or bankruptcies, time may be the only way to heal your credit rating.
HOW TO GET A FREE CREDIT REPORT
All credit reporting agencies will give you a copy of your credit report for a fee. The cost for each individual report can be as much as $79. That can add up when you multiply that by three agencies, or continue to check your rating to see if your methods to improve your rating are working.
The federal government has determined that all people have a right to see their credit reports for free once a year. If you have already exhausted that route, you can get a mortgage rate quote from a lender. As a part of the process the lender will check your credit score and usually share it with you if you ask for it. However, be aware that all you will get in that situation is the actual score, not a breakdown of accounts. An added bonus to using the mortgage lender to get your credit score is you will also find out what types of rates you will qualify for to help you determine when it is the right time to look for that new dream home.