Business & Finance Renting & Real Estate

Home Buyers - Check Your Credit First!

Home buyers often wait until they have a property under contract or until they apply for a mortgage to have their credit reports pulled.
It can take 4 to 6 months sometimes to get inaccurate information removed from your credit reports and even longer to get your credit scores to readjust and increase to where you can qualify for a mortgage.
In the meantime the seller probably isn't going to wait, you may have already spent money on inspections, and you are back to square one.
Getting a copy of your credit reports and credit scores early in the process is an absolute must.
The term credit score usually refers to your FICO score, a number based on a formula developed by the Fair Isaac Corporation, which looks at a summary of all your credit accounts and payment history.
Your FICO (credit) score determines your access to and cost of credit.
Most lenders use it as the main basis for loan or credit approvals, so the higher the better and the lower the more problems.
FICO score ranges from 300-850, and Fair Isaac calculates them for each of the three big credit-reporting agencies: Trans Union, Equifax, and Experian.
Here's how your score is determined: 35% is determined by your payment history.
Do you regularly pay your bills on time to any creditor that submits your information to the credit bureau? Overdue medical bills, utility bills and other bills may appear here.
30% is based on the amounts you owe each of your creditors, and how that compares with the total credit available to you or the total loan amount you took out (debt to equity ratio).
If you're maxing out your credit cards, your score may suffer.
It appears that the ideal is keep your balances below 30% of your maximum credit line.
15% is based on the length of your credit history, both how long you've had each account and how long it's been since you had any activity on those accounts.
The fewer and older the accounts, the better (assuming you've made timely payments).
10% is based on how many accounts you've recently opened compared with the total number of your accounts, as well as the number of recent inquiries on your report made by lenders to whom you've applied for credit.
Your score can drop if it looks as if you're seeking several new sources of credit, a sign that you may be in financial trouble.
10% - The types of credit used determine the final 10%.
Having installment debt like a mortgage, in which you pay a fixed amount each month, demonstrates that you can manage a large loan.
But how you handle revolving debt, like credit cards, tends to carry more weight since it's seen as more predictive of future behavior.
What's not in your FICO credit score: Contrary to popular belief, your age, and employment history and where you live are not used in determining your credit score.
This is not to say lenders when evaluating you for a loan won't consider this information, it's just that it will not factor into your FICO score calculation.
Why do mortgage lenders pay so much attention to these scores? Statistics indicate that there is a 1 in 8 chance that a borrower with a FICO score below 600 will be either severely delinquent or in default of their loan.
While there is a 1 in 1,300 chance that a borrower with a score above 800 will have similar problems.
It is therefore easy to see that lenders will put a lot of reliance on such credit evaluation systems.
So what can you do to get and keep a higher score? First, never have any late payments.
Second, don't have a sudden surge of credit activity and credit inquiries.
Third, don't "tap out" your credit usage.
Using more than 30% of a credit line seems to negatively impact a credit score.
Most mortgage companies will obtain your credit reports and credit scores, with information merged from all three credit reporting agencies, at no cost to you as part of a mortgage pre-qualification.
This certainly is a quick and easy means by which to check out your credit than to buy your credit report and credit score from each credit agency.
However, a federal law (The Fair and Accurate Credit Transactions Act of 2003 - the FACT Act) has gone into effect whereby the credit reporting agencies must provide you with one free report per 12 months.
The official web site is http://www.
annualcreditreport.
com
The free report, however, doesn't include your credit score.
They will still charge extra for your credit score.
Additional information can be found on the Federal Trade Commission's web site (http://www.
ftc.
gov/os/statutes/fcrajump.
htm
).
You also may be entitled to a free credit report under state law.
The following states have laws that make free credit reports available to consumers: Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey and Vermont.
Caution: the credit scores offered by the credit repositories are called consumer scores and are not the same that a lender receives.
If you are applying for a car loan that score is different than the score if you are applying for a mortgage loan, which are different from the consumer score.
Each uses a different scoring method to obtain the three digit score.
The closest score is the FICO score through Equifax.
If you obtain your free credit reports from annualcreditreport, when you get to Equifax, also ask for the FICO score.
It will cost you $7.
95 to do so, but it will give you a better idea of where you stand.
Mortgage lenders pull credit information from all three credit reporting agencies as part of a mortgage application.
You should also.
Married couples should obtain individual reports rather than joint reports, as it is easier to challenge inaccurate information for each of you.
It is also easier to challenge information on reports obtained from the credit reporting agencies separately rather than from a report, which combines information from two or all three agencies.
The reports obtained through annualcreditreport are separate and thus easier to review and then challenge inaccurate information.

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