Understanding credit is one of the first steps in the home buying process.
There are many easy to use online services that provide credit reports to consumers. The 3 main bureaus (Equifax, Experian and TransUnion) can provide a yearly report free to consumers at www.annualcreditreport.com. You should also get a credit score from each bureau.
Be aware credit scores differ depending on the scoring type used. The 3 most common scoring models are Consumer lending, Auto lending
and Home lending and each score may be different.
Now that you have your score and your report you need to dive into it to see what credit items may have affected your score. Customarily you would want scores between 680 to 900. The higher score the likely better home loan interest rate you may get. In addition, higher scores and better credit may give you access to programs that offer more assistance and lending.
Virtually everything on the report will be used to determine scores. Items that may reduce scores are:
Length of time an account is open.
Amount of trade lines open.
Amount owed on credit lines vs. the amount of credit
Late payments on trade lines.
Number of inquiries on the report.
Inaccurate data such as address and fraudulent accounts.
Bankruptcy, judgement and liens.
Length of Time a Trade Line is Open
- Ideally you would want a 2 year history of trade lines on your credit report. Positive history of at least 3 open trade lines
will help a lender determine your ability to repay borrowed debts and manage credit. If you do not have trade lines you maybe able to utilize alternative credit line history such as phone payment history, gas and electric payments, installment payments not listed on the report.
Trade Line Balances
- The amount of credit line available vs. the amount owed on the credit may affect your credit score. When you have a balance on a credit line that is at the max amount that can be borrower, you have a high likelihood of being negatively impacted by this excessive use of that line. You want to show that you can mange the credit extended to you. Keeping balances low (a balance less than half of the credit line) should help improve scores. But you do not want to keep a "0" balance on all credit lines. Keeping a small balance will show that you can make payments and keep the credit open with out running up credit. When you close and account or keep it with a zero balance you are not establishing a 'history' of credit management.
- Once you view your report you will see if any of these "derogatory" items appear on it. If you do have late payments it is critical to get caught up on these accounts. Bringing payments "to-date" will start the process of the credit improvement. Being sure to not make late payments will start creating a "positive" payment history. Just because you have some late payments it does not mean you cannot get a loan to buy a home. It is critical to have a licensed loan officer review your credit lines and compare the guidelines of the lending institution to see if they allow for lates.
- When you are shopping for large items it is not uncommon to visit several places. Buying a car you may have your credit pulled by several lenders. Buying furniture you may apply for new credit cards or credit lines and when buying a home you may shop mortgage lenders whom will want to review your credit. Each time one of these "Lenders pulls your credit" it will most likely be recorded on your report as an inquiry. Keeping these to a minimum when home shopping will likely help reduce negative impacts on your scores.
Bankruptcy, judgement, liens and other derogatory credit items
- Lenders may allow for certain loans to be given to borrowers after these large negative event occur on a borrower's credit. The event most likely must have been solved and a certain period of time must have past. In addition, new trade lines with positive credit history most likely would need to be established. These items can be difficult to recover from with out working with a lender that is familiar with HUD, Fannie and Freddie guidelines. You should consult with a licensed lender to determine if a home loan is viable.