Before you begin shopping for a home (or a mortgage), it’s vital to evaluate your personal financial situation, how much debt you carry, your credit score, how much money you make, how much you spend, and how much you pay out in living and lifestyle expenses each month. To do a complete evaluation:
- Analyze your personal financial situation.
- Determine your maximum mortgage amount.
- Review your credit score.
- Gather and organize the information lenders will require.
Previously, we analyzed our finances and determined our maximum mortgage amount but today, we will focus on the third part of a typical mortgage lender’s evaluation:
Review Your Credit Report and Credit Score
Believe it or not, virtually every single financial transaction in your life involving your use of credit over the past 7–15 years is recorded in your credit file. Lenders can find out how well you paid, whether you paid on time, and whether you over-extended yourself. In addition to your income, debt, assets, and expenses (Part One of this series), lenders also examine your credit report and credit score to determine whether to approve you for a mortgage — and if so, at what interest rate.
- Credit report: A credit report is simply the raw data that lists your current and past credit accounts, including any credit “events.” These include bankruptcies or tax liens, and/or any other information that demonstrates your payment habits. Lenders will read your report to understand the kinds of credit accounts you have, your credit limits, and your history of paying on or paying off those accounts.
- Credit score: Your score is a number, based on your credit report, that reflects your creditworthiness by considering your history within the parameters of specific algorithm. It is an interpretation of your credit report so that lenders can get a quick glimpse of how you pay your accounts, what kind of accounts you use, and how often you seek new credit. A score can range from 300–850, with 850 being absolutely perfect credit. Lenders offer the lowest interest rates to borrowers with scores over 750 or so, though the average credit score in the is around 675.
Do credit scores really matter?
Though lenders look beyond just your credit score when deciding whether to approve you for a mortgage, credit scores are a major factor in determining the interest rate that you receive on a mortgage. With a credit score of 750, you might qualify for a loan at an interest rate of 4.75 percent; if you have a credit score of 550, you might qualify for a loan at 7.75 percent. Though 3 measly percent might not seem like much, on a $200,000 mortgage that difference would cost $4,674.36 per year — $140,230 over the term of a 30-year fixed-rate loan. If your credit score is particularly low (below 600), your best move is probably to work on repairing your credit before you apply for a mortgage loan.
How to order your credit report
Before you apply for a mortgage, it’s crucial to review a copy of your credit report and to get your credit score, which is usually not included in your credit report. You can obtain a free copy of your credit report at www.annualcreditreport.com.
How to review your credit report
The main purpose of reviewing your credit report is to make sure the report is 100 percent accurate. If you find inaccuracies in the report, such as accounts that you didn’t open or past due accounts that you know you’ve paid off in full, you need to correct those problems before applying for a loan. To correct an error on your credit report, contact one of the three credit reporting agencies below—they’re required by law to respond within 30 days to your request.
How to order your credit score
Getting your credit score for free is easy at myFICO.com. Simply click the link and you’ll be able to get the information you need to understand how lenders will view your credit reputation. Plus, you’ll be able to spot errors and get them corrected before applying for a mortgage.
How to review your credit score
Credit scores are relatively easy to review if you remember that you want one over 700 … 750 would be even better. A great credit score helped me refinance MY personal home and save a ton of money in the process. The simple truth is that you need to know your score.
Reviewing your credit report and credit score is a critical action on your part when you decide it’s time to consider taking out a mortgage. Make sure you know your score before you fall in love with a home.