What’s Your Credit Score?
One of the most important aspects of getting a mortgage is your credit score.
You’ve seen the commercials on TV – someone wanting to buy a car or a house. They use a big company to check their score and then there’s that number in a circle with red or green around it. If you end up in the red, good luck getting that car of your dreams. But if your score is in the green, you can sashay your way to the real estate broker, knowing that banks will find you to be a worthy borrower.
Going through the pre-approval process for a mortgage will bring your score front and center. What lies behind that all-important number can seem complicated, so we would like to give you a primer on what goes into your credit score, how you can have a good one, and steps you can take to improve a bad one.
And what’s that target score? 720
Establishing Credit
Your credit score begins when you first start committing to pay things off over time –residential leases, car loans, student loans – and banks want to see at least a 24 month history before they will consider an application.
Additionally, banks also expect you to establish credit by having a minimum of 2-3 lines of credit open – 3 credit cards will suffice but payment plans for buying a mattress or appliances counts too. Some people today, especially younger generations, are reluctant to use credit, having seen the pitfalls that people can get mired in. However, doing so is necessary so when you really need credit, you will have access to it via your history.
If you have done all that, congratulations! You have established credit. And as long as you pay your debts promptly, your credit remains clear.
Getting Bad Credit
Problems arise when bills are not paid when due or your credit cards get maxed out. There are three credit bureaus that track all your payments and if you are delinquent, they will know it and you can say goodbye to your good credit history.
What’s the number 1 driver of bad credit? Unpaid medical bills. Procedures can be expensive, even with health insurance. Negotiating with the provider and setting up a payment plan is always better than flat-out non-payment.
How about student loans? Huge no-no not to repay those. Defaulting on a Federal loan makes you ineligible for ANY loan that is Federally insured.
Credit cards – Since banks want to see 2-3 lines of credit open, you will need these but how you use them and pay them back is key. If you have debt that is spread out over your cards with timely payments, you should be fine. But maxing out one card is bad. $3,000 on each of 3 cards is better than $9,000 on one. And if your total credit available is $10,000 and you have used up $9,700, that will not look good.
Judgements & Collections – do you have a lien against you from a workman? Or do you owe back child support? Judgements against you will show up on your report, as will any bills sent to a collection agency, be they utility, medical, etc.
Finding Out Your Credit Score
There are three credit bureaus that track all your credit and to whom banks turn for a report on your history. They are Experian, Equifax and Trans Union. Each has their own scoring system, but the results are the same – they can identify people with good or bad credit.
You can also apply to any or all of these agencies to find out the state of your score:
Equifax: 1 (888) 378-4329 | www.equifax.com
Experian: 1 (888) 397-3742 | www.experian.com
Trans Union: 1 (800) 916-8800 | www.transunion.com
Once you see your score, you will know if you are in the clear of if you need to take steps to fix your credit.
Improving Bad Credit
Sometimes small items that can be easily cleared up can affect your credit score enough to cause a problem. Other times, larger issues can require more time and funds to straighten out. Knowing your credit when you first think about buying a house is important in case you need to adjust your time frame to fix your score. The steps to take will depend upon the issues you have.
Disputing inaccuracies – You paid off your car loan but the records show that it is still open. Keeping records of satisfied loans will help you correct this kind of situation. Or, if a debt attributed to you is NOT yours, you will need to prove that you are not the person in question.
Paying off liens or judgements – they need to be explained and paid if they are really yours
Traffic violations – believe it or not, sometimes red light tickets will come up on credit scores.
All of these negative factors need to be addressed to improve your chances of being eligible for a mortgage. Paying off overlooked debts or making payment plans for larger ones is the first step. Complicated inaccuracies could take longer to fix, so you need to get on those right away.
Working With a Mortgage Broker
Assisting you with your credit score is one of the top jobs for a mortgage broker. At Par East, we look at your score right away in case it will delay your prospects. Once we pull it, we will provide recommendations on how to make improvements if necessary. Your credit worthiness is the number 1 driver of your mortgage application. Having confidence in your purchasing power before you go looking at properties all starts with your credit score and will help make your house hunting go as smoothly as possible.