One of the first steps you need to take when you’re buying a home – even while you’re only thinking about it – is to check your credit. Lenders will certainly check it when you apply for a mortgage, so it’s in your best interest to scope out the situation before they do; that way, if you need to make improvements, you’ll have ample time.
Why You Should Check Your Credit Before You Buy a Home
Checking your credit lets you know exactly where you stand. You can sign up for a free app, such as Credit Karma, or you can get an official copy of your credit report. Thanks to the Federal Trade Commission, you’re entitled to one free copy from each of the three major credit reporting bureaus every year (Equifax, TransUnion and Experian).
What if There are Errors on Your Credit Report?
If you discover errors on your credit report, contact the agency that’s reporting them. You may be surprised to learn that many people have errors on their credit reports – and that those types of issues could cost you mortgage approval.
- Incorrect names
- Addresses of places that you never lived
- Names of employers you never worked for
- Accounts you don’t recognize
- Accounts that show incorrect balances
- Incorrect negative account information, such as late or missed payments
Each agency has its own method for requesting review for errors, and the processes for filing a dispute is listed on each agency’s website.
Credit Report Basics
Your credit report contains all kinds of information about what kind of borrower you are. It tells lenders, through your credit score, whether you pay your obligations on time (and if you pay them late, exactly how late you are). It also shows lenders how much money you’re eligible to borrow compared with the amount of credit you’re actually using, which can indicate whether you’re financially stretched at the moment.
What Kind of Credit Score Do Lenders Want to See?
Lenders use their own scoring formulas, though most rely on a borrower’s FICO score. Here’s a quick breakdown on credit score ranges:
- 300 to 629: Poor
- 630 to 689: Fair
- 690 to 719: Good
- 720 to 850: Excellent
Generally, a higher credit score qualifies you for more favorable interest rates and terms on a mortgage loan. Many lenders don’t loan to people with scores below 620.
What if Your Credit Score is Low?
If you have a low credit score, you may pay a higher interest rate than you would if your score was higher. You may be able to improve your credit score by using these tips:
- Pay down your credit card balances to keep your overall credit usage low.
- Avoid making late payments.
- Don’t close old credit accounts.
- Don’t apply for many new lines of credit, particularly right before you apply for a mortgage. (However, sometimes applying for and being approved for a new credit card can improve your score – if it increases your available lending balance, the ratio of debt you hold becomes lower.)
Are You Buying or Selling a Duplex, Triplex or Fourplex in Silicon Valley?
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