Credit score pointers for home buyers
By Mina Minelli, Senior Vice President & Shoreline/Central Regional Manager, Home Loans, Webster Bank
When you’re ready to finance a new home, you may get thrown a curve ball—your credit score. A recent study by the National Foundation for Credit Counseling found that 36% of people think there's no reason to check their credit score, much less what kind of credit score you need to buy a house. The better your credit history, of course, the better your chances of getting a mortgage with a favorable rate. But there’s more to know about credit scoring and home mortgages. To avoid striking out, it helps to know some key rules of the game.
1. There’s a difference between your credit score and your credit reports.
A credit score is a number summarizing your credit risk, based on your credit history. It helps lenders evaluate your credit profile, which in turn guides the credit they make available to you, including loan and credit card approvals, interest rates, credit limits and more.
Your credit reports shape your credit history. Three major credit bureaus house your credit data: Equifax, TransUnion and Experian. Whenever you get a new loan or credit card, or make or miss payments, that creditor reports the information to the credit bureaus. It’s captured in your credit reports.
It’s common for your credit reports to be slightly different at each credit bureau, since creditors can report to any, all three, or none.
2. The credit score you pull from the web isn’t the one lenders use.
Think of the score you get online as over-the-counter. The score that lenders use is prescription-strength
Some people pull their credit score from a website and go to the bank, believing their 800 score is a homerun. They are later stunned to discover that the lender may pull a score that is significantly lower.
Mortgage lenders use an approved industry model specific to mortgage financing. It’s based on algorithms that drill down to get a comprehensive credit risk assessment on a consumer. This model’s algorithm takes into account your scores from all three credit bureaus. Lenders then base their calculations on the middle of the three scores. This approach gives them a much tighter fix on your ability to repay a loan.
Remember that lenders will pull that mortgage-specific score on the day you apply for the loan—one more reason to keep your score in the best possible shape.
3. Look for mistakes in your credit reports, because they’re more common than you might think.
According to CNBC, more than one in five consumers have “a potentially material error” in their credit file—a mistake that makes them seem like a bigger risk than they actually are.
You’re entitled to a free credit report every twelve months from each of the three major credit bureaus. That right is guaranteed by Federal law and checking your report doesn’t hurt your score. In fact, it may help you identify an error. While many websites offer those reports, the official site is www.annualcreditreport.com.
Note that you’ll get your credit reports, but not your credit score.
You can request all three reports at once or you can order one report at a time. By requesting them separately (for example, one every four months) you can monitor your credit reports throughout the year. Remember, your credit report is a snapshot in time, so reviewing it throughout the year allows you to get a clearer picture of your overall credit position.
Go over each report and challenge any errors with the credit bureau providing it. Filing a dispute isn’t difficult and it doesn’t cost you anything. Each credit bureau has its own easy steps to follow. Find them here:
4. Trying to improve your score? Don’t close out your oldest credit cards.
Perhaps you’re now using a newer card offering valuable rewards, from hotel discounts to airline points. But those older cards in your wallet have a deeper credit history—and your credit history is the most important way for a lender to assess your risk.
Keep your older cards open. If you close them, you’ll wipe away all the credit history they carry—and you could be shortchanging yourself on a mortgage rate.
5. Have you cosigned on a loan? Bear in mind that will affect your credit score.
Maybe you cosigned a car loan for the teenager in your family. Never mind the fact that he or she is paying the monthly bills—if there’s ever a late payment, it will hurt your score. Cosigning means you are equally responsible for the payments.
Don’t overlook any cosigned loans when you approach mortgage lenders, because these factor in.
6. Resist the temptation to open new cards.
Some people get so excited about their upcoming move, they open credit cards at several furniture and appliance stores. Remember, the more debt you add, the less house you’ll be able to afford. If you’re suddenly paying another $600 a month on credit cards, that’s $600 a month you potentially won’t have for a mortgage. Only assume more credit when you truly need it.
On that same point, defer opening new loans or credit accounts. The debt you add will ding your score. Lenders may be concerned that you’re taking on too much.
7. Keep your credit card balances low.
We recommend keeping them below 30 percent of the credit limit on each account. The ratio between the amount of credit you have and the amount you owe is a key factor in your creditworthiness. If you maintain enough available credit, you’re less likely to need more funds. Lenders will note that—and see you as less of a risk.
8. Warm up well for your time at bat.
You wouldn’t expect your favorite team to jump into the season without spring training. Take the opportunity to get financially fit first. Before going to a lender, review your credit, assess your finances, and put a budget in place.
To buy a house, you need a credit score in the best possible shape. Paying close attention to your credit can improve your chance at qualifying for a more flexible loan with a better rate. Make every season of your credit life a winning season!