Credit: The Financial Cornerstone
For many homebuyers, credit is a big consideration in the buying process. When you apply for a mortgage, your credit rating may be the single factor that can open or close the door to purchasing a home. You may believe you have a strong credit rating, yet have never seen your credit report. Or perhaps you’re concerned that past credit problems will come back to haunt you when applying for a mortgage. It’s best to be sure. The following Q&A will help.
What is “credit?”
Credit is a record of a person’s debts and payment history. Credit bureaus compile individual reports of consumer debt using an array of sources, including credit-card companies, banks, the Internal Revenue Service, department stores and other entities that grant loans.
What is a credit report?
It is a résumé of your financial performance, with information on your payment standing for all accounts you've held for the past seven to 10 years. Seven years for accounts not paid as agreed, and 10 years for accounts paid as agreed.
When you’re ready to buy a home, the first step is always the same... several months before you begin looking at homes, obtain a copy of your credit report(s). America has three primary credit-reporting agencies: Experian, TransUnion and Equifax. Since each may contain different information and you don’t know which agency will be supplying a report to your lender, it’s a good idea to obtain a report from all three agencies. There are nominal fees, and you can order reports through the Web.
Next, review your reports for accuracy. If information that would improve your credit score is incorrect or missing, report it to the credit bureau. Under the U.S. Fair Credit Reporting Act, consumers have the right to review and contest information in their credit reports. Even if your credit report reads exactly as you expected and your credit is in fine shape, going into the mortgage application procedure with peace of mind is worth your time and any fees involved.
What is a credit score?
Credit scores, also called "beacon scores," are composites that indicate how likely you are to pay, as agreed, on a loan or credit card. Scores are based upon payment history, amount of debts, length of credit history and types of credit in use. The credit grantor reviewing your loan application compiles a score based on credit-report information and other data, including income.
Scores range from 300 (poor) to 850 (excellent), and the rule of thumb is the higher the score, the lower the risk to lenders.
What role does credit play?
Lenders review credit reports to determine debts owed and whether they have been repaid according to contract terms. When you have outstanding debt, lenders will analyze your debt-to-income ratio and how that debt may affect your ability to make mortgage payments.
What do I do when I get my report?
Read through it carefully, paying extra attention to the section on account payment history.
How do I correct a mistake?
Follow the directions of the credit bureau that issued the report. If you dispute an item, the bureau will contact the information source, and attempt to resolve the dispute. Also, if late payment information is accurate but you have a good explanation for it—such as a serious illness—you have the right to add that information to your report.
How do I establish credit?
If you have never obtained a credit card or borrowed money, or if your accounts are new, you can still establish credit history. Here’s how... have rent payments to landlords and monthly payments to utility companies added to your credit report.
How do I re-establish good credit?
If your credit report contains negative information, such as frequent late payments, repossessions, collection activity or bankruptcy, it may be wise to wait to apply for a mortgage until after you’ve improved your credit record.
The best way to rebuild credit is by showing a strong payment history in the years following any credit problems. Most lenders prefer that three years pass since a mortgage foreclosure and at least two years since bankruptcy. If you establish a pattern of responsible debt repayment after problems, lenders may be willing to forgive past black marks on a credit report.
