If you are considering purchasing a home or refinancing—you can go to quickenloans.com or lendingtree.com along with local mortgage lenders in your area—to determine what loan will best suit you—and your family. You can compare closing costs, APR's and Par rates to determine what loan will best serve your—and your family's long-term interests.
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Even before you plan on purchasing or selling your home it is imperative that you know your credit report and credit score situation upfront.
You should also have a six month emergency fund in place and/or have other compensating factors at work (i.e. a low housing and debt ratio, other household income that is not included in the formal application, future inheritance/settlement, expected bonus/pay raise not included in calculation of mortgage etc.).
Use the following links as a guide only—as your real estate agent/loan officer may be able to give you more current and accurate data—even though credit reporting and credit rating formula changes are made infrequently.
You can go to the link below to receive one free credit report per year from all three credit (Equifax, Experian, and Trans Union) bureaus. Make sure you agree to all of their terms and conditions.
January of every year is a great time to pull your credit reports and make financial planning decisions that are good for you and your family.
FREE CREDIT REPORTS
Did you know that most lenders use credit scores from the three major credit bureaus (TransUnion, Equifax and Experian) when deciding whether or not to approve your mortgage loan.
To receive your credit scores for free or a nominal fee log on to the sites below and make sure you agree to their terms and conditions:
FREE CREDIT SCORES
Also realize that the scores you receive from these sites may not be the same as those that will be used by your mortgage company but they should give you a relevant number that you can utilize to help you make a better informed home purchase decision prior to meeting with a loan officer and/or real estate agent.
If your score is not in the top tier (750 or higher out of 850)or top 1/3rd of those in the American population there are practical things you can do now to improve your position.
You want to be in position to get the lowest rate possible on home and auto loans, credit cards, auto (46 states now factor your credit history into an "insurance score") and homeowners insurance.
If your score has gone up significantly since you received your last auto and/or homeowner insurance quote--now may be a good time to get an updated quote as you could possibly see annual savings in the hundreds of dollars.
If you are at a credit score level of 740 or
higher you can get credit cards with rates as low as 7% interest and even some
at 0% interest up to 24 months at some credit card companies.
What You Must Know If You Want To Improve Your Credit Reports And Credit Scores
Some Mortgage Lenders will be concerned with how many “inquiries” you have, the different “types” of credit you have, how much credit you are “using”—utilization, how “timely” you have been on making your payments, and whether you have really “messed up” by having delinquent and/or public record accounts.
However, many lenders use automated underwriting and they are mainly concerned with your credit score.
However, if you have a lot of inquiries, very few types of credit, low credit utilization, untimely payments and/or public record items they will all work in conjunction to pull your score down.
Proper credit management and credit scoring is highly correlated—meaning proper and good use of your credit will enhance your score—and improper and poor use of your credit will negatively affect your credit score.
Do your mortgage loan shopping in a concentrated time frame so it does not look like you are shopping for multiple loans for multiple properties.
Detailed Analysis of Your Credit
Negativity---Key Facts: 35% of your score
Again, pay in timely manner, do not let your accounts get into a delinquent status.
Do your best to never get in a situation where you have liens, bankruptcies or other public data showing on your report.
Many delinquent accounts and bankruptcies stay on your credit report for 7 to 10 years.
Keep in mind that you are entitled to add a personal statement to your report.
I am uncertain of the effect that a personal statement on your report will have on the credit scoring system. However, it might help a creditor who would otherwise deny you credit--- possibly consider granting you credit.
Utilization---Key Facts: 30% of your score
This is a key area as lenders are particularly concerned about the amount you owe on your credit in relationship to the credit limit or high limit.
Your creditors usually report to the three major bureaus the day the billing cycle closes.
For example if your billing cycle with your credit card ended on the 10th of the month they would report on that day.
Always aim to keep your credit use to the absolute minimum based on your financial situation.
You should make it a goal to eliminate all credit card debt with a written plan and timetable to eliminate it based on your own particular cash flow (budget) position.
Timeliness---Key Facts: 15% of your score
This is also a key area as it shows your reliability in meeting your current debt obligations.
Late payments make you less appealing to creditors and lenders and can be a literal red flag if you are 90 days late (90 days late on your report will be in red), 30 to 60 days late would be in yellow. Always pay your bills in a timely manner if at all possible.
The current credit scoring model has a 24 month look back, so make sure all of your payments in the last two years are current and on time to maximize your credit score.
If you have one late payment or an unusual late payment ask your creditor for a one time goodwill adjustment.
Don’t be shy about asking—especially if you have otherwise good payment habits. There is a good chance that it will be granted.
Types of Credit---Key Facts: 10% of your score
The major part of your report lists your open credit accounts plus those closed within the last ten years.
The amount owed and the high limit or initial loan amount will be included.
The lenders when analyzing the type of credit basically want to see that you can handle a mix of credit types.
To maximize the benefits of different types and age of credit keep your oldest accounts open and active.
You may have to use your card once or twice a year to keep it open and active in order for them to have a more favorable effect on your credit score.
Inquiries---Key Facts: 10% of your score
“Hard” inquiries appear when you apply for new credit.
Only Hard inquiries from the past year affect your credit score.
The fewer Hard Inquiries you have the better it is for your credit score.
“Soft” inquiries are made when you or an existing creditor checks your report.
Soft inquiries usually have no effect or a mild affect on your credit score.
To minimize the effect of inquiries on your credit do your loan shopping within a short window—say 14 days or so.
Final Thoughts on Credit Reports and Credit Scoring
Although the algorithms and formulas used to score your credit is complex and highly secretive, Improving your credit and credit score is really quite simple if you have adequate cash flow.
I have worked with many past clients whose credit score increased over a hundred points in a matter of months.
The key was that they had adequate cash flow, a properly funded emergency fund, a properly funded retirement fund and adequate insurance coverage.
By substantially paying down their credit card and other debt in a few months their credit scores soared significantly.
Improving and maintaining your credit basically comes down to paying all your debt on time, establishing a good mix and length of credit, proper and responsible use of your existing credit and keeping “hard” inquiries down to a minimum by not seeking new credit frequently.
By keeping the above tips in mind and following the above advice you will make yourself more attractive to not only a mortgage lender, but any lender.
Also realize that there is also another scoring model called Vantagescore--and although the factors used to calculate that score differs from what FICO uses, you will still have no problem achieving your credit goals if you master the factors listed above.
To learn how you can better understand credit cards—and how the knowledge gained can help improve your credit and financial life click on the above link.
Final Thoughts For Those In A Difficult Financial Situation
If you find yourself in a situation where you can’t make your monthly debt payments and meet your living obligations you will have to obtain more income by possibly getting a better paying job and/or a second job and/or cutting your monthly household expenses.
Bankruptcy is an option that you should pursue or consider only after you have exhausted all other means as your credit will be severely affected for years to come.
About This Article:
The above article was written by Thomas (TJ) Underwood. Thomas (TJ) Underwood is an active real estate broker in the state of Georgia and is the writer behind The Wealth Increaser, Home Buyer 411, Home Seller 411, The 3 Step Structured Approach to Managing Your Finances, Managing & Improving Your Credit & Finances for this MILLENNIUM and CREDIT & FINANCE IMPROVEMENT MADE EASY—FREE GUIDE.
He is the creator of TheWealthIncreaser.com where he regularly blogs about helping consumers improve their credit, finance and real estate pursuits in an intelligent, consistent and proactive manner. He’s always looking for ways to make intelligent finance improvement happen for those who “sincerely desire” success in their future.
You can contact him from a number of sources but the most direct way is to contact him through the contact us block that can be found at the bottom of this page.
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