Home Buyer’s Credit Basics

If you’re considering purchasing a new home, you undoubtedly know how important credit is. In most cases, the better your overall credit is, the lower down payment the bank will require. If your credit is atrocious, you might not find a bank that will offer you a mortgage even if you have a 50% down payment. In the world of finance, credit is everything.

Keeping an eye on your credit score is a lot easier than it used to be. There is an abundance of credit monitoring websites that will alert you every time something is posted to your credit record that affects your credit score. Credit Karma is probably the most well-known credit monitoring service. Most of its basic services are free, which is an unbeatable price!

There are three major credit bureaus in the United States – Equifax, TransUnion, and Experian. We mention all three for a reason. Some credit card companies and many banks might pull your credit score and complete credit record from only one or two of the major credit bureaus. It’s important to know what your credit score is with all three of the major credit bureaus. For example, your Equifax score might be 760, TransUnion score 780, and Experian score 640. If a bank obtains your credit reports from Equifax and Experian, your overall credit score will be lower than if it had used your scores from Equifax and TransUnion. Know your score from all three credit bureaus to avoid any surprises.

The highest credit score you can have is 850. Anything below 500 isn’t worth mentioning. Although not written stone, below are the general credit score guidelines used by many lenders.

  • 760 – 850 – Acceptable risk. The closer your score is to 850, the better your chances of obtaining low interest rates.
  • 675 – 759– Generally acceptable risk. You would probably be offered a loan or mortgage but not at the lowest interest rates.
  • 620 – 674 –Questionable. You might be offered a loan or mortgage but only if you’re able to present acceptable documentation and reasonable explanations.
  • 500 – 619 –Possible. You won’t be eligible for low interest rates or even moderate rates, but you might find a lender will to offer a high interest loan or mortgage.
  • Below 500 – Unacceptable. It’s doubtful any lender will offer you a loan or mortgage.

In addition to knowing your credit score, it’s IMPERATIVE that you know what’s in your credit record. An estimated 25% of all applicants who are denied mortgages had errors in their credit record. Going wild during Spring Break and maxing out your MasterCard is not the type of error we’re referring to. Clerical errors happen all the time. If a bank reports an overdue credit card and the social security number is keyed in wrong, the credit card could end up in your credit record.

You can correct errors in your credit record by filing a claim, which normally means filling out a form. State exactly why the information in your credit record is wrong. First you need to determine which credit bureau posted the error to your credit record. The websites for the three major credit bureaus are www.Experian.com, www.TransUnion.com, and www.Equifax.com. Once you know which credit bureau is reporting the error, visit its website and begin the process of having it removed.

One of the most important bonuses you can give yourself when applying for a loan or mortgage is to pay off all or most of your credit cards or outstanding loans. Even if you have the required 20% down payment, a bank might deny you a mortgage if it sees that you have $30,000 in outstanding credit cards and loans. The bank will look at your overall financial picture and not just your credit score or down payment. In addition to an acceptable credit score and no errors on your credit report, you must have the required minimum down payment, and a low debt-to-income ratio.

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