Archives for June 2015

Check Credit Before Buying a Home

What is a Credit Score? Imagine that a friend asks to borrow money from you.  Assuming you had the money to loan, you might then ask yourself, “Did he pay me back the last time he borrowed money?  Did he pay me back the full amount?  On time?”  When you approach banks and lenders for a loan, they go through a similar analysis, but since they do not know you personally, they use your credit history to determine whether you will be a responsible borrower.  Lenders learn about your credit history by looking at your credit report.

You can get a free Credit Report Card that includes your free credit score right now.  Credit reports are developed by three separate credit agencies. These agencies (Equifax, Experian, and TransUnion) gather information about your credit history, and, using a formula developed by Fair Isaac Corporation (FICO), each assigns you a credit score. You will end up with three slightly different credit scores, each from one of the three agencies. Lenders typically look at your middle credit score (as opposed to the highest or the lowest), and you must provide all three of your credit scores (one from Equifax, one from Experian, and one from TransUnion), when applying for a loan.

Why are Credit Scores so Important When Buying a Home? Your credit score helps determine the rate and conditions you receive on a loan.  If your credit score is high, meaning that your credit history indicates that you have paid your credit card bills on time, have not “maxed out” your credit cards, etc., then lenders believe it is a fairly good bet that you will not have difficulty paying off your loan. They will see you as a low-risk investment and offer you a low rate on your loan with good conditions.  If your score is lower, lenders will think you are a riskier investment, and charge you (by loaning you money at a higher interest rate, often including hidden charges) to take on the perceived risk.

How do Credit Scores Affect You When Applying for a Loan? Most lenders have a baseline credit score by which they largely make their decision to approve or deny mortgage applicants. The maximum credit score is 850 (though a score of 850 is rare, indeed. Only about 10% of applicants have a score over 800). Any score in the 700’s or above is excellent and will get you a loan with the lowest interest rate. When you get into the 600’s it starts getting dicey.  So you can see the importance of keeping a good score.  It used to be okay to miss a credit card payment deadline. You might pay a $15 late fee. But if you do this on a regular basis, it can savage your score and cost you many times that amount when you want to buy or refinance a home.  That is the bad news.  The good news is your credit score is not fixed in stone.  If you have bad credit scores, there are ways to improve your credit health.  If you find your scores are lower than you expected, you will need to engage in credit rehab.  From a financial standpoint, it is almost always better to take the time to improve your credit health, and make yourself eligible for a better interest rate, than it is to apply for a loan with a credit score that will only make you eligible for a subprime loan.

Find Out Where You Stand. You can check your credit score each month using Credit.com’s free Credit Report Card.  This completely free tool will break down your credit score into sections and give you a grade for each.  You will see, for example, how your payment history, debt and other factors affect your score, and you will get recommendations for steps you may want to consider to address problems. In addition, you will also find credit offers from lenders who may be willing to offer you credit.  Checking your own credit reports and scores does not affect your credit score in any way. 