Home prices in most parts of the country are just about as affordable as they are likely to get, and mortgage rates remain super low. Together, those factors mean that many people are thinking about buying a home. Some will be first-time homebuyers, while others will be “boomerang” buyers who lost their homes in the housing meltdown but are now hoping to get back in. Still others may see this as the best time to upgrade to a larger home, downsize to a smaller one, or to move to the retirement locale of their dreams.
Whatever your motivation for buying a home, unless you are going to pay cash for the property, there’s one essential step you must take first: get your credit reports and credit scores.
The reason? Your credit scores will help determine what type of home loan financing you can get, and the interest rate you’ll pay. You’ll want to have plenty of time to dispute credit report errors if you find any, and get them fixed. The last thing you want is to find out at the last minute that you can’t buy your dream home because of something on your credit report that shouldn’t be there.
If you will be buying and financing a home with someone else — a partner or spouse, for example — you’ll each want to get your credit reports and scores. Get them from all three major credit reporting agencies; Equifax, Experian and TransUnion, as they each collect their own data and don’t share corrections with each other. You can do this for free once annually at AnnualCreditReport.com. Beyond that, Credit.com’s Credit Report Card is a free tool that provides you with an easy to understand overview of your credit standing, along with your free credit scores, which is updated monthly. It’s a good and simple way to keep tabs on your credit regularly, because you’ll quickly be able to see if anything is amiss.
[Credit Score Tool: Get your free credit score and report card from Credit.com]
You’re Not Just a Number
The three-digit number that represents your credit score will be important when it comes to buying and financing a home. A difference of a few points could make a difference in the rate you’ll pay for your mortgage. Mortgage lenders will typically use the middle of the three credit scores to determine the rate/program for which you qualify.
But that doesn’t mean you need to obsess about your score. Doing so can cause you unnecessary grief. After all:
- Trying to tweak your scores based on what you think may help improve them can sometimes have the opposite effect.
- There are many different loan programs with different credit score requirements. A loan officer can help you shop around to find the right program to meet your needs.
Keep in mind that you have many scores, not just one, so trying to figure out which scores matter most can be an exercise in futility. When it comes time to apply, your lender will pull the credit scores needed to process your application. In the meantime, you can find out where you stand and get an idea of what factors may be strong, and which may not be. Again, no need to obsess over the number.
In fact, when we included a free credit score with our free Credit Report Card — one of our most popular tools — we wanted to make sure that consumers understand that they don’t have a single score. That’s why we provide an Experian score, but also show consumers their VantageScore and estimated FICO score along with it. After all, there are dozens of scores available at any given time, and if you focus on just a single number, you may miss the bigger picture.
[Credit Score Tool: Get your free credit score and report card from Credit.com]
What’s in a Number?
If focusing on the number that represents your credit score isn’t the most important thing, then what is? Understanding the elements that make up your scores can be much more important. Our Credit Report Card, for example, assigns a grade to each of the main factors that go into a score:
- Payment History
- Debt Usage
- Credit Age
- Account Mix
- Inquiries
Within those, we recommend you put your efforts toward the things you can control. If you get a “C” or “D” for a particular factor, you’ll get suggestions for things you may do to address that grade. Some of these may be things you can address immediately while some may not be under your direct control.
If you earn a “D” for debt usage because your balances on one or more of your credit cards is close to your limits, you may want to pay some of them down if you have the cash available to do so. On the other hand, if you have a large student loan balance that you can’t afford to pay off, you may want to simply focus on making your payments on time rather than taking all the money you’ve saved for a down payment to pay it off.
[Related Article: What's A Credit Score, Really]
What Can Your Score Do For You?
When it comes to buying a home, your credit scores can help you secure the financing you need to buy the property and pay it off over time. Your credit scores are a tool to help you achieve your personal and financial goals. If you can get the loan you need with the credit scores you have, then be satisfied with that — even if you don’t have the best score your loan officer has seen!
And finally, it’s important to put your scores in context. Mortgage lenders will look at other factors, like your debt-to-income ratios, employment history, and down payment. As any loan officer can tell you, even a perfect score can’t get you a loan if — for example — the appraisal comes in too low, or if you can’t document your income.
[Featured Products: Research and Compare Mortgage Rates at Credit.com]
Image: iStockphoto
Gerri Detweiler Gerri Detweiler is Credit.com's Director of Consumer Education. She focuses on helping people understand their credit and debt, and writes about those issues, as well as financial legislation, budgeting, debt recovery and savings strategies. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.com.
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The Lender usually hires the Appraiser. Make sure that you have an input on the Appraisal Company hired. Be sure the individual is young enough not to have dementia or understands the states building codes and what constitutes the difference between a non-attached patio and an attached in-closed addition, with its on heating and AC, to the structure. Even if the two or three outside walls have many windows, and made of different material from the original structure.
This can cause your home,s total square feet to be smaller if the appraiser does not include the sq.ft. of the addition as part of the total living area of the home when he is comparing your home with sales in the area. Example; 1430sqft vs 1828sqft
yes i do think having a good credit is very high concern for most of us and keeping up with your credit-score i think its a good thing to do.
I like to ask when someone are getting marriage and there partner credit are not so good can that effect the person that have good credit how does that work with marriage someone there credit not so good and all. I understand it can effect your credit-ability please comment. thank you.