What does your dream home look like? 4 bedrooms, 5 and a half baths with a massive garden and a white picket fence? Or perhaps you would rather an ultra modern home with head-to-toe glass walls so you can enjoy a gorgeous scenic view? The dreaming is the easy part; you’ve got a whole lot to do before you get the keys to your castle, so you better get right to it!
This is the first of many articles in our ‘Want To Buy a House?’ guide. Every week, we’ll talk you through the next step in this process so you’re ready to go when prime home-buying season kicks off.
First things first. Before you even think about looking for houses, you want to take a good look at your credit rating, sometimes known as a FICO score. Your credit score is derived from your history with paying back loans and other debts. A high score means you’ve made regular repayments in the past and are therefore more likely to be granted a mortgage by a lender.
Consider this article a crash course on everything to do with your credit score and how to improve it so you’re in the best possible shape to get that mortgage loan.
Get your credit report
In order to assess what your next steps are, you need to know what your credit report looks like. The three main U.S. credit bureaus (Equifax, Experian and TransUnion) release their own credit reports (a longer history of your relationship with credit that feeds into your overall score). Each uses slightly different sources to determine your score, although the final number will be roughly equivalent. Experian for example, takes timing of rent payments into account whereas TransUnion looks closely at information from previous employers.
Mike Durr from Nation Reliable Lending in Kingwood, TX suggests getting a professional analysis from a mortgage loan officer for best results, however, if you want to see a more basic version of your credit for free, you can visit: https://www.annualcreditreport.com where you can get a copy of your report from all 3 credit-reporting companies every year for free. The only catch is that your final score isn’t included in your report, so use this as a rough guideline only. A full analysis from your mortgage lender will give you a far more complete picture.
Another option is to ask your credit card company. A few companies including Capital One and Discover give their customers access to their credit scores. Once you get an up-to-date report, go through it carefully, paying special attention to the ‘adverse accounts’ section that outlines all late or non-payments.
Determine where you are right now
Credit scores aren’t complicated: The better your relationship with credit, the higher your score–and the higher your chances of getting approved for a mortgage loan. You need a minimum credit score of 580 to qualify for the FHA’s 3.5% down payment. Many lenders will require a minimum score of 620.
Worried because your credit score isn’t exactly what you were hoping for? No need to lose hope, as our advice here is designed to help you boost your score and get to where you need to be.
Check for errors and dispute them
A study carried out by the Federal Trade Commission in 2013 showed that 5% of credit reports actually contain errors* that might bring your score down. It’s important to thoroughly comb through your report so you can deal with it early. If an error is found, the first step is to send a dispute letter to the credit bureau, making sure all supporting documentation is included as per the FTC guidelines*. Next, you will need to contact the organization that gave you the inaccurate report and tell them to update the information with the relevant bureau. Be aware that this process will require a lot of documentation and could take some time. In the end, you’ll be left with a more accurate credit report and a higher score.
Remove one-time mistakes
Perhaps you missed one payment deadline a couple of years ago–happens to the best of us. Most homebuyers aren’t aware that you can actually request to have a missed payment removed if it’s an isolated incident… While there are no guarantees, it’s worth a quick inquiry to the company who reported the late payment. Simply ask if they are willing to remove this from your report. It’s often referred to as a “Goodwill Adjustment” and it’s definitely worth a call! (If you need more details on this, please contact Jean below for recommendations)” Of course, if you have consistently been late on payment, calling the company wouldn’t do much good.
Up your credit limit
The most obvious way to improve your credit score is to pay off all outstanding debts, but that isn’t always possible. Another quick fix is this: call your credit card company and ask them to increase your credit limit. Doing this will improve your debt-to-credit ratio which contributes to your credit rating.
Let’s say you owe the credit card company $1000. If your limit was $1500, a $1000 is quite bad. But if your limit is $5000, the situation suddenly seems less dire even though you still owe the same amount. Using a smaller portion of the total credit available to you reflects very well on your credit history.
Pay on time, every time
If you want to improve your credit rating, you can’t afford to treat payment deadlines like they’re optional. You have to decide to pay all your bills on time and create a system such as automatic payments, to make sure you do it.
It takes time to build up your credit history. Unfortunately, negative items (skipped and late payments etc) can remain in your credit report for almost 7 years. Changing the way you handle your debt will have a massive effect on the ‘payment history’ section of your report which makes up a third of your score. It is therefore in your best interest to start using these tips as early as possible so you can focus on finding that dream house.
Once your credit rating is in order, you’ll need to move on to the next step: making the down payment. Come back the same time next week to see all the best tips on saving up for a down payment.
*http://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports (Credit dispute guidelines)