Potential home buyers can spend years saving for a down payment, months creating a budget, and weeks looking at properties before making the plunge. Too often, though, they overlook a crucial step on the path to purchase: checking their own credit report and credit score. Your credit report and credit score could be the keys to unlocking that white picket fence to your new home. Let’s take a look at why this is so important.
The Credit Report
A report is the laundry list of your credit history. Credit cards, student loans, car payments, past mortgages, etc. are all detailed, along with whether you are in good standing for each of the accounts. Reports reveal who is examining your credit report (such as lenders) and contain some personal information (such as employment history and bankruptcy filings).
There are three credit-reporting bureaus: TransUnion, Equifax, and Experian. Each of these bureaus issue separate credit reports for individuals. They also issue a unique credit score.
The Credit Score
Rather than sifting through lengthy credit reports to assess lending risks, financial institutions make loan decisions based on, in part, one’s credit score (often called the FICO score). The scores are meant to signal how well a consumer will handle future credit. The majority of mortgage lenders use FICO as the means to determine the type of loans buyers qualify for and the appropriate interest rates.
Consumers are often frustrated with the fact that there is no exact formula for determining a score. Each bureau creates its own, taking into account a variety of factors, including, but not limited to, the length of credit history, type of accounts, payment history, and the ratio of debt to credit limit. Even the score range is not uniform, though the scale is generally between 300 and 850.
What is a “good” credit score for homebuyers? Well, that can be hard to generalize, but to obtain an FHA loan (one of the most common for first-time buyers), a credit score of 620 or above is preferable. Those with a score over 720 are considered to have excellent credit.
Why Should I Check It?
Reports and scores are not free from error. Unfortunately, many of them are subject to it. A 2013 Federal Trade Commission report found that 20% of consumers have errors on their credit reports, and for 5% of consumers those errors are enough to affect their credit scores. With these statistics in mind, it is an absolute must that potential homebuyers check theirs for accuracy.
Individuals are entitled to one free credit report each year from each of the three bureaus. These reports can be obtained all at once or at different intervals. To get your free copy, visit www.annualcreditreport.com or call 1-877-322-8228. In addition, www.myfico.com can provide scores, but be wary of any fees that may apply. Review the information carefully and dispute any mistakes in writing. Under the Fair Credit Reporting Act, both the credit reporting company and the information provider (that is, the person, company, or organization that provides information about you to a credit reporting company) are responsible for correcting inaccurate or incomplete information in your report.
Fixing inaccuracies can be a lengthy process; this is why reports and scores should be reviewed well in advance of trying to secure funding for a home. Don’t let three digits stand between you and your home-buying dream. If you would like more information or have discovered an error and need help in correcting it, contact the real estate attorneys at McBrayer.
For more information on how credit scores can affect a mortgage, please view the Understanding Mortgage Credit Scores guide from Zillow.
Joshua J. Markham is a member at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Markham practices in virtually every aspect of real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, lease negotiation and preparation, and any and all other needs related to residential and commercial real estate matters.He can be reached at firstname.lastname@example.org or (859) 231-8780, ext. 149.
This article is intended as a summary of federal and state law and does not constitute legal advice.