In my last column, I reminded you that home prices are still attractive and interest rates are still a giveaway, so this spring might be just the right time for you to start your search for a new or resale home.
The first step you should take in the homebuying process doesn’t even involve a house. Instead, it involves you. Examine and understand your credit history before you do anything else.
If you plan to obtain a loan to help you buy a home, your credit score will be critically important in determining if you will be approved, and if so, what terms you will be offered.
More than ever, lenders rely on a three-digit number to decide whether or not you are worthy of a loan to buy the house of your dreams. Knowing that number can give you insight into challenges that may be ahead..
A decade ago, lenders were ready to approve almost any applicant for a home loan. But times have changed. Today’s’ strict underwriting guidelines make it tough to borrow unless you have near-perfect credit and a stable job situation, a combination less common than in previous decades.
So, what can you do now to begin the process of buying a home and improve your chances of loan approval at the same time?
LEARN ABOUT CREDIT SCORING.
The first step you should take is to visit the website of Fair, Isaac & Co. at MyFico.com.
There you will find materials explaining how credit scores work and what factors influence your score. You will be offered a chance to buy your score, but I recommend waiting.
Next, I suggest you visit the website AnnualCreditReport.com and pull a free copy of your “in-file” credit history from Equifax, Experian and TransUnion.
These three credit repositories maintain and update information used to calculate your credit score. Problems or errors in your credit report will likely mean a lowered credit score.
Check your credit history carefully to determine if it is accurate. If there is derogatory information (typically late payments), consider calling the credit granter and asking that they remove the negative information, especially if there were special circumstances.
For example, if your credit was hurt during a product dispute, call the lender and ask to have the information changed. It can’t hurt and it might very well work.
Also, look for the proportion of your credit being used. In other words, your balance compared to your maximum available credit. Whenever possible, your balances should be less than 50 percent of your credit line, and the best scores are obtained by people with utilization under 30 percent. If you are unable to lower your balance, apply to the lender for an increase in your credit limit.
Know that ON-TIME PAYMENTS and CREDIT UTILIZATION account for 65 percent of your credit score. None of the other factors is nearly as important. But every point counts, so you should know that there are other factors considered.
KEEP CREDIT ACCOUNTS OPEN to build longevity.
Closing one account and opening another looks to creditors like you are churning your credit, and it alarms them. Instead, keep unused accounts open by using them at least occasionally.
The length of your credit history accounts for about 15 percent of your score, so strive for long-term relationships with quality merchants and institutions.
MINIMIZE NEW CREDIT REQUESTS.
Each application you make generates a credit inquiry, and too many inquiries signals the bureau that your circumstances may have taken a turn for the worse. This factor makes up about 10 percent of your score.
KEEP A HEALTHY MIX of credit types.
A mix of active credit cards, retail accounts, installment loans, and mortgages would indicate prudent use of credit. Overuse in any area could indicate a credit dependence. This area accounts for the final 10 percent of your score.
Know that the overall picture used by the FICO computers to calculate your credit score is based on a snapshot of your credit history at a moment in time, and it can quickly change dramatically. Your score is based solely on data contained in your credit report, and does not take into account your age, race, gender, or any personal information not relevant to your credit history.
On the Money99.com website this week, I will share with you additional resources on credit and a strategy for obtaining your three-digit credit score without cost.
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