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Checking Your Credit Before Purchasing A Home

by Jon Smith, CRB, CRS, GRI

If you are planning to be a homeowner in the near future, you should access and check your credit report before starting to look for a home. Most lenders usually prefer to check your credit report before considering your application when you apply for a loan. The information in your credit history helps the lenders in deciding your credit worthiness and how much credit to offer you in case of a loan approval. Your credit score will also decide which interest rate you are eligible for. 

The first critical step is to review your credit report to check for any errors.  Unfortunately, many people fail to take this all important first step. Instead, they wait until they have applied for a mortgage loan to find out from the lender that there are problems with their credit scores.

By checking your credit score before you apply for a mortgage loan you gain the opportunity to find out if there are problems which you can correct and discrepancies that need to be removed. There are three national credit reporting agencies that you can choose from: Experian, Trans-Union and EquiFax. Remeber that you are also eligible for a free credit report annually by law, click here to get your free 3-in-1 credit report.

Review your credit report carefully for any errors and if you find any discrepancies you have a right to contest it. You will need to contact the credit reporting agency and explain why you believe the item is incorrect and thus you will need to provide documentation such as receipts and cancelled checks can help your claim. Bank Rate offers some great advice on fixing these errors along with the forms you will need. Although this is will be an inconvenience it is better to get everything cleared up before you fall in love with a home only to be denied a loan due to problems with your credit report.

Examining Your Credit History

by Jon Smith, CRB, CRS, GRI

As indicated earlier, your credit report and history are key to obtaining your home loan. We encourage you to view your credit report yourself, prior to the lender’s viewing of it, by contacting one or all three of the major credit reporting companies: Equifax, Experian, and TransUnion. All you have to do is call and request it. Once you receive it, check the "high credit limit," "total loan," and "past due" columns. It is a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports.

Credit reporting companies:

You can also get a copy of your credit history at the following online locations:

www.freecreditreport.com
www.creditreports.com

What if I find a mistake in my credit history?
You can correct simple mistakes by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders usually understand about legitimate problems.

What about my overall (or FICO) score? What does it mean?
Prior to the late 1990s, credit scoring had little to do with mortgage lending. When reviewing your credit worthiness, an underwriter would make a subjective decision based on past payment history. Then things changed.

Lenders studied the relationship between credit scores and mortgage delinquencies and found a definite relationship. Almost half of those borrowers with FICO scores below 550 became ninety days delinquent at least once during their mortgage. On the other hand, only two out of every 10,000 borrowers with FICO scores above eight hundred became delinquent.

When can I stretch the percentages?
Depending on your area's housing market, lenders sometimes will allow you to stretch their allowable debt ratios. One of the best ways to encourage your lender to do so is to increase your down payment, as indicated in the following chart:

Allowable Monthly Housing Expense

Underwriters sometimes also will stretch the ratios for other "compensating factors," including:

  • Strong cash reserves after close of escrow
  • A new payment that’s only slightly higher than current rent or mortgage payment
  • A history of increasing earning capabilities
  • A history of an ability to save money
  • A large cash down payment

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Photo of Jon Smith, CRB, CRS, SRES, SFR Real Estate
Jon Smith, CRB, CRS, SRES, SFR
Iowa Realty
3521 Beaver Ave.
Des Moines IA 50310
515-240-2692
Fax: 515-453-6404
 

 

 

Licensed in the State of Iowa