More so than ever before, lenders are relying on a three-digit number to decide whether you are worthy of getting a loan to buy the house of your dreams. And knowing that number in advance can greatly improve your chances of getting approved.
I must begin by saying that in the past 35 years there has never been a better time to buy a house. Prices are low, sellers are very willing to negotiate, and interest rates are so low that we may never again revisit this opportunity.
That being said, today's underwriting guidelines make it tough to borrow unless you have perfect credit and a stable job situation, a combination increasingly rare in this economy. So what can you do now to wisely begin the process of buying a home and improve your chances of loan approval at the same time?
Learn about credit
The first step you should take is to visit the website of Fair, Isaac & Co. at www.MyFico.com. There you will find a library of educational materials explaining how credit scores work and what factors influence your score. And even though you will be offered an opportunity to buy your score, I recommend waiting.
Pull your own credit report
Next, I suggest visiting the free site www.AnnualCreditReport.com and pulling a free copy of your "in-file" credit history from Equifax, Experian and TransUnion. These three credit repositories maintain and update the information that goes into calculating your credit score.
If there are problems or errors in your credit report, that will translate directly into a lower credit score.
Check your credit history carefully to determine whether it is accurate, and if there is derogatory information, consider calling the credit granter and asking that it remove the negative information, especially if there were special circumstances surrounding the transaction. For example, if a credit card issuer charged you a late fee because the mail was one or two days late in delivering your payment, 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 credit being currently used. In other words, what is your balance compared with 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 those whose use is less than 30 percent of the maximum.
Know that on-time payments and credit use account for fully 65 percent of your credit score. None of the other factors is nearly so important as these two in determining your score. So looking at your credit history in advance is a critical step in buying a home.
Find a lender and get prequalified
I have personally had nightmare experiences with Internet lenders and regretted the day that I tried to save one-eighth of 1 percent on my loan by applying with an online lender. Internet loans may work for some people, but I require that there be a loan officer in my town that I can look in the eye and demand answers from.
Get referrals from people you trust and beware of "controlled business arrangements." That's the term for a legal scheme where agents, lenders and attorneys all share in the profits of referring business to each other. There is, in theory, nothing wrong with such an arrangement, but I just prefer a completely heartfelt recommendation.
Make sure the lender you select is a mortgage banker, not a mortgage broker. That means he is lending his own money instead of having to submit a package to an underwriter in Los Angeles (or worse).
The lender should be willing to meet with you privately, ask a bunch of nosey questions, then pull your three credit reports and scores and share those scores with you. He should also be willing to offer suggestions on how to quickly improve those scores if you are borderline for approval.
For more strategies on the path to homeownership, visit my website at Money99.com.
John Adams is an author, broadcaster and investor. He answers real estate questions at noon Saturdays on WGKA (920 AM).
For more real estate information or to make a comment, visit www.money99.com.
