For many homebuyers, credit is a big consideration in the buying process.
In applying for a mortgage, your credit may be the single factor that opens
or closes the door to purchasing the home you want at a low interest rate.
You may believe you have a strong credit rating but have never actually
seen your credit report. Or perhaps you're concerned that past credit
problems will come back to haunt you as you apply for a mortgage
Whichever boat you're in, the first step is the same: Obtain a copy of your
credit report for a small fee and review it for accuracy. Credit reports
are maintained by three credit reporting agencies:
Equifax. It's a good idea to obtain
your credit report from all three agencies, since each may contain
different information and you don't know which agency will be supplying
your report to your lender.
If there is incorrect or missing information that would improve your credit
score, report it to the credit bureau. Under the Fair Credit Reporting Act,
consumers have the right to review and contest information in their credit
reports. Even if your credit report reads exactly like you expected and
your credit is in fine shape, going into the mortgage application procedure
with peace of mind is worth the nominal fee.
Credit is a record of a person's debts and payment history. Credit bureaus
compile individual reports of consumer debt through an array of sources,
including credit card companies, banks, the IRS, department stores and
gasoline companies, and any other entities granting loans. A credit report
is a résumé of your financial performance, with information on your payment
standing for all the accounts you've held for the past seven to 10 years
(seven years for accounts not paid as agreed and 10 years for accounts paid
Credit scores, also called "beacon scores," are composites that indicate
how likely you are to pay on a loan or credit card as agreed based upon
your payment history, amount of debts, length of credit history and types
of credit in use. The credit grantor reviewing your loan application
compiles your score based on information from your credit report and other
data, including your income level.
Fair, Isaac and Company (FICO) developed the mathematical formula for
establishing scores. Scores range from 300 (poor) to 850 (excellent), and
the rule of thumb is the higher the score, the lower the risk to lenders.
In the past, consumers have not been allowed to view their credit score or
be informed of the factors that determined their scores. However,
C.A.R.-sponsored SB 1607, signed by California Gov. Gray Davis on Oct. 2,
2000, granted California homebuyers access to their credit scores and
pertinent information about what factors determined their scores. The
legislation, which becomes effective July 1, 2001, also allows consumers to
receive their credit scores when they request copies of their credit files
for a nominal fee.
Lenders review credit reports to determine debts owed and if they are
repaid according to the terms of the initial contract. If you have any
outstanding debt, lenders will analyze your debt-to-income ratio and how
that debt will factor into your ability to make your mortgage payments.
If you have never taken out a credit card or borrowed money from a
financial institution, or if your accounts are young, you can establish
credit history by having your rent payments to landlords and monthly
payments to utility companies added to your credit report.
If your credit report contains negative information, such as frequent late
payments, repossessions, collection activity or bankruptcy, you may want to
wait to apply until after you've improved your credit record. Rebuild your
credit by showing strong payment history in the years following any
problems. Most lenders prefer for three years to have passed since a
foreclosure on a mortgage and at least two years since bankruptcy. Lenders
are willing to forgive past black marks on a credit report if you establish
a pattern of responsible debt repayment.
Follow the directions of the credit bureau issuing your report. The bureau
will contact the source of the information in question and attempt to
resolve the dispute. Also, if late payment information is accurate but you
have a good explanation (e.g., you were laid off from work or became very
ill), you are allowed to add that information to your report.