What Should I Be Aware of on my Credit Report?

A home buyer’s overall credit, and FICO score is a significant factor that will be considered by lenders when looking at your loan application. Lenders want to know a home buyer’s credit history and whether or not he/she has the ability to pay back the loan you will be granted. In short, good credit usually translates into lower interest rates for the home buyer because it represents less risk to the lender.

During the pre-approval process, a mortgage broker or loan officer will run a credit report to determine your creditworthiness and credit score, which can range from 300 to 850.  Even if you have a relatively low score (under 660), it doesn’t mean you can’t qualify for a loan. There are loan programs available even if you’ve had a recent bankruptcy. While you may not get the interest rate you hoped for, there are many options for scores at all levels. In fact, FHA loans only require a score of 620 to get very good interest rates.

Aside from the credit score, there are many ‘dos’ and ‘don’t’s’ regarding overall credit.  Here is a list of best practices when it comes to credit:

DO:

-       Try to have at least 5 tradelines, which can be in the form  of a car payment, mortgage payment, credit card payment, etc.  For example, if you have 1 car payment and 4 credit cards that have been used in the past 3 months, that should improve your score.  Having more or less tradlines than this could have a adverse affect on credit

-       Try to have most of your tradelines for at least 5 years

-       Try to payoff your credit card debts to both raise your credit score and increase your affordability

-       Run your credit well in advance of purchasing a home to find out if there are items that you are unaware of (such as a late payment, credit fraud or a small medical or phone bill that is unknowingly in collections).  Getting rid of these items could take months, so it’s best to know in advance so you have time to take care of any derogetory items on your credit report prior to the pre –approval process

DON’T:

-       Close out or cancel credit cards in order to look more creditworthy, this will most likely have a negative effect on your score!

-       Apply for new credit cards within 12 months of buying a home if possible, this will lower your score

-       Purchase large-ticket items on credit right before or during the home buying process

Additionally, with all of the recent foreclosures, short sales and loan modifications that have been taking place of the past few years, it is important to know that there is typically a 2-4 year freeze on qualifying for a loan if anyof these activites took place.  It is highly recommended that you speak with a mortgage broker or loan officer regarding your credit to make sure that it is sufficient to qualify and make recommendations if there are items that can be fixed quickly to help a home buyer’s credit.