“I’m holding off on a mortgage loan until May or June. We don’t want an inquiry until that time. This will help us have a better credit score for loan approval.”– K. Lozoya, BAS Client looking in Concord, CA
It’s very seldom I hear prospective home buyers talk like this when they call us for a buyers agent recommendation. It is apparent that Mr. Lozoya quoted above, has been doing his homework to get a good understanding of the things that need priority. But not everyone knows where to start. For most consumers buying a house can be overwhelming in the beginning. That’s why it’s crucial to know what needs to be done first and foremost. Getting approved for a loan is typically on the top of the list.
The hosts of the B&L Consumers Real Estate Radio Show that aired on January 25, 2020, stressed to their 20,000+ audience, “Know What You Are Doing”. Guest speaker Del Vanessen, a Colorado expert lender in Community Banks Mortgage, talks about one of the most important things that first time home buyers must know, their credit-worthiness.
Listen in as Barry, Larry, and Del talk about the importance of knowing your credit standing early. In fact, it will benefit any buyer to know it for many months or years prior to considering a home purchase:
Why Do Lenders Require An Established Credit History?
Most home buyers will attempt to research and educate themselves when they have decided they want to buy a home. Some buyers may skip finding representation, such as engaging the services of a buyers agent. Yet another important matter that most first time home buyers tend to forget is knowing their credit history. An individual’s credit history will show if he/she responsibly demonstrates the ability to repay debts. Not until they start applying for a home loan do they realize that the success of a home purchase will greatly rely on it. Lenders take a hard look at the credit report, meticulously review it, and make a decision to either approve or deny a mortgage loan application. Without early guidance, sometimes people lose the opportunity to “clean up” their credit report, resulting in the denial of a loan or having to pay higher rates.
In case you are wondering, there is no way to build a credit history overnight. The process is the same and gradual for everyone. Building a credit history starts as an individual continues taking on financial debts and paying them on time. This is why it is important that consumers check on their credit history to see where they stand prior to a big purchase. Getting a good loan at a decent interest rate will require a good credit score.
A credit report will show a summary of your credit history that includes the following information:
- your name, address, and Social Security number
- credit cards
- how much money is owed, and
- if a consumer pays bills on time or is delinquent
Why Is It Important For Home Buyers To Check on Credit Report Ahead of Time?
Checking your credit history and having a good credit score will prove to be vital in a home purchase because it can affect the timeliness of completing the stages to get to closing. The benefits of doing it ahead of time can make the home buying process run smoothly, limit the chance of delays and increase the possibility of a home loan approval. Many buyer agents require at least a preapproval letter before agreeing to show properties. As always, preparation is key.
Below are the opportunities presented when you check on your credit report ahead of time:
- Rebuild or maintain good credit. This is the best way to learn if your credit history is in good standing and shows financial capacity. Having a stable income and a good employment history also contribute to a good credit standing. Lenders look at this to determine your ability to pay and make timely payments. Also note that if your credit report shows a score of 740 and above, it increases your chance of getting a better interest rate.
- Manage personal finances. Don’t limit reviewing your finances on bank statements alone. You can do it better by also reviewing your credit and making sure that you keep track of all types of spending. Doing this will also allow you to check if all credit entries on the report are valid. Mistakes on credit reports are not uncommon. The report gives you the opportunity to determine a history of problem areas. An early review allows you time to file disputed items.
- Here’s a good example of how something that seems insignificant can have a huge impact on credit scores. One of our buyer agent’s clients was not aware that returning a book late resulted in a debt collection of $10. That small amount pulled their score down by 75 points! It’s a huge decrease for a small amount that could have been easily prevented had they checked on their credit report earlier or on a regular basis.
- Identify inaccuracies. You can be on top of your credit report by making sure that everything that pertains to you is accurate, such as personal information reported to the credit bureau agencies. Any form of inaccuracy or inconsistency may result in a drop in your credit score and may be detrimental to your future plans for getting loan approval for a home purchase.
What Can First Time Home Buyers Do To Help Build or Maintain Their Credit Score?
If you know that you’ll be working on a tight budget, make sure that your credit history checks out several months to several years before considering a home purchase. How do you establish a good credit history? Make sure that everything that links to your finances is running smoothly from its sources down to your spending habits. If you want to secure a future real estate closing, take serious notes of the following tips:
- Establish a good employment history and work on a steady income. Lenders like to see a good cash flow because that basically shows promise in the ability to repay a loan.
- Research and continue to educate yourself about what affects your creditworthiness. Also, be sure to check the upcoming changes that FICO will implement with the way it determines credit scores. According to NPR.org, FICO changes the credit scoring system every five years or so. It also reports that scores will typically decline for people in the lower FICO score range, about 580 and below. Now that’s all the more reason to request your credit report as soon as you can.
- Manage your finances responsibly. Here are a few tips from reputable banks and lenders to bring your credit score ready for your home purchase:
- Pay debts on time every time. Unpaid dues and late payments can cause a big drop in your credit score. A great way to avoid this is to pay your balance in full every month. Doing that will also save you from paying interest fees.
- Keep an established credit history. Do not close old accounts. Ask your bank to issue a new card while keeping your credit history, instead of closing your old accounts.
- Maintain a low outstanding balance. Do not be persuaded into buying stuff like furniture on sale just prior to the home purchase. It’s easy to be attracted to these sales because of 0% interest rate offers, but keep in mind that there will always be another sale after the home purchase is made. Avoid anything that will add more to your debts and strictly keep your balance below the minimum. Financial experts advise using only 30% or less of the amount of your account’s available balance. By doing this, you are able to show that you have good control over your finances.
- Finally, seek expert advice, especially if you have plans to venture into a big transaction such as a home purchase. Have a sit a down with professionals and financial experts to review where you are so you are provided with proper guidance to establish or improve your cash flow and credit standing.
When To Check Your Credit Report?
Experian, one of the 3 major credit reporting agencies, recommends to at least check your credit report annually. Doing this can save you from numerous potential risks like fraudulent transactions and identity theft. Surprisingly, these are two of the most common scenarios that negatively impact a credit score. It is possible that the reports may slightly differ from one another, and this is why Del highly recommends checking your credit report from all three credit bureau agencies.
Where Can You Get The Best Guide As First Time Home Buyers?
Whether you are a cash buyer or you need a loan, your buyer agent can recommend local financial experts. The Buyer Agent Search Service offers free consultations and many home buying videos are available on the YouTube channel. Take advantage of this free service anywhere in the United States, Canada, and Costa Rica. Simply communicate your needs by filling out the online form and the team will contact you back in no time. Get access to top buyer agents whose expertise can protect your best interests in the process of home buying. Call 800-383-7188, Mondays through Sundays and talk with any of the staff or Kathleen Chiras herself.