Clarke Jackson is a Kentwood Realtor who councils her clients about how to get the best home loan mortgage. Credit Scores are part of the secret.
When considering buying a home and getting a home loan mortgage, consider some questions first.
How much do you know about your Credit Score? Did you check it online recently? Do you know if that action affected your credit? Was it what you expected? Would it have been the same last week? Credit is something we all know about, and know is important. But there are a lot of misconceptions and mysterious surrounding your credit score.
Let’s start with the basics. What is your credit score? A credit score a number between 300 and 850 that shows the likelihood for you to pay back loans and credit. It only shows a credit score at the moment that credit report is generated and can change based on things you do and don’t do from day to day. It is roughly comprised considering your new loans and credit, the length of your credit history, types of credit you have (revolving accounts, installment loans etc.), your payment history, and the amount you owe overall. Not surprisingly, your payment history is the most important of these!
How Credit Effects Home Loans
Good to Excellent credit scores result in lower home loan interest rates. This graph shows how Experian factors credit scores according to My Bank Tracker.
So why is credit important when you’re purchasing a home? Well, of course most of us don’t buy houses in cash (if you can,that’s great, but you’re one of the lucky few) therefore, we need to take out a mortgage. When you get a mortgage, the interest rate you pay is partially based on the risk the lender is taking on. A higher credit score, means you have a lower risk of not paying the loan back and paying on time. A lower risk means the lender doesn’t need to raise the interest rate as much to protect themselves from not getting paid back, so your interest rate gets lower.
Your rate can make a huge impact on your monthly payment and, in reality, the home price you can afford. So, if you’re thinking about buying a home, you should be thinking about your credit too! Keep in mind, right now, most lenders use the FICO 4 credit score, also known as the mortgage lender score, so that score you see online might not be the one lenders are using!
So here’s what you came for, things you can do that make a big difference in your credit.
Avoid Co-signing Loans
This can actually takes a negative toll on your credit! Any late payment made on that loan you co-sign is added to your credit history. Co-signing a loan is basically lending out your credit history and can make you very vulnerable to infractions that will lower your score.
Don’t Close Revolving Accounts
I know it must seem crazy to keep that old credit card you got when you were in your 20s just to get that one perk that is now completely irrelevant. But, closing any line of credit is generally a bad idea. Keep in mind, it might be closed automatically through lack of use so use.
Don’t Open New Accounts
Counterintuitive as it may seem, if you’re about to get a credit report, opening a new account is actually a bad idea. These accounts will negatively affect your score until they are “established” which won’t be until about 4-6 months after you’ve opened them.
Difference Between a Soft and Hard Inquiry
Best Company provided this graphic explanation of hard and soft credit score inquiries.
When you are shopping for a home loan mortgage, you need to get your credit score reviewed. And, there are two ways to do this a “soft” inquiry which does not affect your credit and a “hard inquiry” which can. The bureaus allow you one “freebie” hard inquiry credit check per year, but when you are shopping for a mortgage, chances are each lender you go to will want to do one of these “hard inquiries” to get an idea of your financial standing and score.
Wait, wouldn’t that mean if I went to 3 lenders I would get 3 dings to my credit? Well, yes, unless you go to all of those lenders within a 15 day period. The bureaus know when shopping for a lender you will want to try a few, but you need to keep it within that time period so when you do get your loan, there’s no backlash. Even so, don’t panic, after about three months, any negative effect from a hard inquiry will be erased from your score.
Pay Bills on Time or Early
Okay, this one is pretty obvious, but it’s extremely important. One tiny late payment (the amount does not matter at all) of 30 days or more will stay on your credit for seven years! Keep up with your bills and double check your auto-payment accounts to make sure they are going through as planned.
Monitor Your Credit Score
I know we talked about hard inquiries and how they can bring your score down. But again, you get one per year with no effect on your score whatsoever. In the years you’re not buying a house, check it yourself and make sure everything looks how you expect it to look. A great resource for this is www.annualcreditreport.com.
Prevent Identity Theft
A lot of this is common sense. Your personal information (any of it!) can be used to compromise your identity. So, keep things like your medical insurance ID number, social security number, receipts, and signatures as private as possible. Make sure to review payment statements to make sure the charges are all ones you made. And never give any information out over the phone or internet unless you are sure who you are talking to is trustworthy. You also have the option to freeze your credit at any time so no one can use it, but if you do this, be sure to keep track of the pin they give you! Unfreezing is easy, unless you lose that pin number!
Report Fraud ASAP
If, despite your caution, your identity is compromised, don’t wait to report it! Report it right away. There are three credit bureaus Experian, Equifax, and Trans Union. They get their information from various creditors reporting to them. If you are a victim of fraud contact your credit card, banks, and thes bureaus immediately! This isn’t exhaustive and because each person’s financial situation is different there are a ton of “what-ifs” and “how about whens” that everyone has. The solution? Talking to a lender is a great way to get started. Most lenders have a lot of knowledge about specific credit situations (as they’ve seen a lot!).
Your Real Estate Professional is a great way to get in contact with a reputable lender. That lender can get you help with your credit without the negative credit affects of formal credit counseling. (Yes, this is bad for your credit too!) Getting a handle on this might seem like a lot to do. But, if you protect your identity and pay your bills on time, overtime, you’ll have a healthy robust score. Here’s to your happy home and to giving yourself some credit!
It is also a good idea for potential home buyers to monitor their credit. I am not a proponent of paying for it because you can get a free report from the credit bureaus or just have a mortgage profession pull it. But I can’t tell you how many times I have had clients that were unaware of certain items or had inaccurate information on their report. Often these things can be dealt with without too much issue unless you wait until your interested in home which is what many seem to unfortunately do.
It seems most buyers wait until right before they are ready to purchase to check their credit which in my opinion is a mistake. It is amazing the impact just 10 or 20 points could have on total amount a buyer pays over the life of a loan. Many buyers think it is nothing because the amount looks so small when they see it as a fraction on point. What I often see is people keeping balance higher than 50% on their credit cards. Even though they pay it off every month it might not be be off when their credit it reported.