A Credit Check is Essential Before Buying a New Home

Have you reviewed your credit score recently? If you don’t know your score, you may be at a disadvantage when it’s time to obtain a mortgage for your new home. In fact, a credit review should be the first step you take when you begin your search for the perfect Central New Jersey home.

Why Are Credit Scores So Important?

Lenders review FICO credit scores to make loan approval decisions and also to set interest rates. The scoring formula was devised by the Fair Isaac Corporation to make it easy for lenders to apply uniform standards to all borrowers. Typically, the higher your credit score, the lower your interest rate. Several factors are taken into consideration when your FICO score is generated, including:

• Payment History: Do you make installment payments for mortgages, automobile loans, credit cards and other accounts on time every month? When the agencies look at your history, they’ll also consider missed payments and any accounts in collection.

• Amount Owed: Carrying large amounts of debt can lower your score, as borrowers may assume that you might have trouble making payments if you already have a high debt load.

• History Length: The scoring process not only scrutinizes the age of your accounts, but also considers when each account was last used.

• New Credit: How many times have you applied for new credit cards or loans in the past year? Applying for too much credit tends to lower your score.

• Type of Credit: Your score is also affected by the type of credit accounts you have. A combination of several types, such as a car payment, store credit cards and a mortgage, is regarded as proof of your ability to handle multiple types of credit.

According to the Fair Isacc Corporation, payment history is weighted at 35 percent when your score is calculated, while the amount you owe affects 30 percent of the score. History length, new credit and types of credit aren’t weighted quite as heavily, with length only accounting for 15 percent of the score and new credit and credit types weighing in at 10 percent.

FICO scores range from 300 to 850, although there’s almost no chance that you’ll ever be approved for any type of credit if your score is only 300. In fact, ratings below 620 are considered poor, while 620 – 699 is a fair score. You will be much more likely to be approved for a mortgage with a lower interest rate if your score is good (700 – 749) or excellent (750 or higher).

How Can I Get a Copy of My Credit Report?

It’s a good idea to review the information on your credit report about six months before you plan to buy a home. Should you notice any errors or discrepancies, you’ll have plenty time to request a correction before you start to apply for mortgages.

You’ll need to obtain reports from the three credit reporting agencies: TransUnion, Experian and Equifax. All of these companies are required to provide one free credit report per year upon request. You can request a copy from all three by visiting annualcreditreport.com.

Although you might think that the agency reports would be identical, they can vary significantly. It’s important to review all three of the reports, as you won’t know which company the lender you choose will use to obtain your FICO score.

What Should I Look for on My Credit Reports?

Because even the smallest error can affect your score, it’s important to review every part of the report. Look for errors or omissions in these categories:

• Basic Information: Is your name spelled correctly? Are your current and past addresses correct? What about your date of birth?

• Employment History: Are all of your employers included and listed correctly?

• Current Account Information: Does the report show all of your current accounts? Are the payment amounts correct? Are all of the accounts listed still open?

• Closed Account Information: Is the information about your closed accounts accurate?

• Inquiries That May Impact Your Credit Rating: If you’ve applied for credit in the past two months, you’ll see the name of each company here.

• Incorrect Facts: Check the report for misspellings, incorrect amounts, duplicate accounts or payments erroneously marked as late. Sometimes, reports contain information about accounts you’ve never held or even bankruptcies or collections that aren’t yours. A thorough review of your credit report can identify errors that can lower your score. If you have had a bankruptcy in the past, it should not be listed if it’s more than 10 years old. Collections should drop off your report after seven years.

If you do notice errors or incorrect or outdated information, get in touch with the credit reporting agency and the company that provided the information to the agency. All of the agencies offer convenient online dispute forms. Agencies must investigate your report within 45 days after you submit your dispute. If they determine that there is an error, they have 30 days to correct your report. Since the process to dispute and correct errors can take a minimum of two months, requesting your reports well in advance of the time you expect to begin house hunting is a must.

What If I Have a Tax Lien or Civil Judgment?

Both tax liens and civil judgments can affect your FICO score, but they’re less likely to make an impact, thanks to the recently enacted National Consumer Assistance Plan. As of July 1, 2017, information on tax liens and judgments can only be included if the data includes a full name and address, and a date of birth or Social Security number. Credit bureaus must also make sure information obtained from public records is correct by visiting courthouses every three months, according to a Creditcards.com article.

Although these requirements sound very basic, they will actually prevent many liens and judgments from being included in credit reports. In addition to these changes, traffic tickets, court fees and fines will no longer be included, and you’ll be provided with a corrected copy of your credit report at no cost if you successfully dispute an error. Additionally, medical debts can’t be included if you’re in the process of paying them or your insurance company has paid the debt.

What Should I Do If I’m Not Happy with My Scores?

Fortunately, there are a few things you can do if your FICO score is low. If you’re afraid that you have too much debt, pay off loans and make extra payments on your credit cards to lower your balance. Avoid closing any credit cards or opening new accounts while you work on raising your score. A late payment can undo all the hard work you’ve done to improve your score. Arrange to pay your bills automatically, or set reminders to ensure that every payment is made on time.

Is a 20 Percent Down Payment Necessary?

Generations ago, it was difficult to buy a home without a 20 percent down payment. Although that’s no longer the case, paying 20 percent or more is still a good idea if possible. If you pay less than 20 percent, you’ll be subject to private mortgage insurance (PMI), a program designed to reimburse your lender if you stop making your mortgage payment. The monthly PMI fee is added to your mortgage payment and can only be stopped when you have 20 percent equity in your home.

Once you’ve reviewed your credit reports and are happy with your credit score, the real fun can begin. You can finally embark on your journey to home ownership confident that you’ll obtain the most favorable interest rate.

An excellent FICO rate may allow you to purchase the house of your dreams. If you're on a house hunt, Country Classics' new construction opportunities offer gourmet kitchens, plenty of living space, and several structural and design options to truly customize your home. Contact us to learn how you can become one of the newest Country Classics homeowners in Central New Jersey.

Sources:

Fair Isaac Corporation: Credit Payment History

https://www.myfico.com/credit-education/credit-payment-history/

Consumer Financial Protection Bureau: Buying a Home? The First Step is to Check Your Credit

https://www.consumerfinance.gov/about-us/blog/buying-home-first-step-check-your-credit/

Bank of America: How Much Should You Put Down When Buying a Home?

https://www.bankofamerica.com/mortgage/learn/mortgage-down-payment/

Creditcards.com: Credit Bureaus Tighten Reporting Rules: Who Wins, Who Loses?

https://www.creditcards.com/credit-card-news/national-consumer-assistance-plan-winners-losers.php