When you’re ready to buy a house, you know that your credit score is important – it’s all anyone can talk about! But why exactly is it so critical? What impact does your credit score actually have on your ability to buy a house? We spoke to Betsy Saxon, Mortgage Loan Officer for First Bank Mortgage in Pooler, GA, to get the scoop on all the ways your credit score can affect your new mortgage. Ms. Saxon is an expert when it comes to helping potential home buyers prepare their credit reports for the intense scrutiny they’ll face when it’s time to choose a new home.
First of all, you need to know what is on your credit report. Ms. Saxon recommends that you start the home buying process with a visit to www.annualcreditreport.com, the only free credit reporting site authorized by Federal Law. Everyone is entitled to one free credit report every 12 months from the three major credit reporting agencies; TransUnion, Experian and Equifax. By logging on to this site, you can see what your lenders will be looking at when they examine your credit worthiness. A common misconception is that when you receive your credit reports, you will also receive your credit score. Your credit score is actually a number derived from a mathematical formula; the raw data on your credit report is plugged into the formula, and the credit score is calculated. You can also get your credit score from this site for a nominal fee – usually around $6 to $7.
Once you’ve obtained your reports, go over them carefully. If you spot anything that doesn’t look right, such as credit cards you don’t recognize, denials for credit that you didn’t request, or items in a collection status that you can’t identify, address these problems as soon as you can. These are red flags that will make it much more difficult for you to be approved for a home loan. “Most people don’t check their credit reports as often as they should. You get a report for free each year from the big three,” Ms. Saxon says. “Be sure to take advantage of this. Check your credit reports each and every year. You can help stop identity theft and fraud if you are on top of your credit reports and you know what is in them. You can also resolve any errors that show up before they become a major issue.” Any derogatory credit events that have happened within the past ten years can be reported, so it is best to work out these difficulties before they become firmly entrenched in your reports.
Sometimes legitimate items will show up on your credit report that will surprise you. For example, you may see a bill from a doctor’s office that is in collections. You never visited that doctor, so you call to investigate. It is then that you find out your ex-wife, who has primary custody of your children, took them to the doctor and didn’t take care of the co-pay. Why would that affect your credit report? Isn’t that her responsibility? Not always. If you carry the children on your health insurance, ultimately, the responsibility for the co-pay is yours, regardless of who gets the bill. Situations such as this one happen more often than you would think, and can have a devastating effect on your credit rating. This is one of the reasons it is essential for you to check your credit reports every year.
Why does having a clean credit report with a high credit score mean so much? In a nutshell, lenders are much more likely to work with people who have a high credit score, because they have a great track record of paying their debts on time. There is much less risk involved when they loan money to these people, instead of folks with a lower credit score caused by short payments, missed payments, loan defaults or bankruptcies. The common thought among lenders is if they’ve done this before, they’ll do it again. They don’t want to lose money on this type of gamble.
Not only are you less likely to get a loan with a lower credit score, if you do get a loan, your interest rate is certain to be higher. The more interest that gets tacked on to the principal of your loan, the more you need to pay in the long run to satisfy the debt. Most people also don’t realize that other types of monthly payments can be influenced by your credit score. For example, insurance premiums can vary based on your credit score. Home or auto insurance premiums are often higher if your credit score is low.
Also keep in mind that your credit reports will be monitored for the entire time you are engaged in the home buying process. If you are buying an existing house, in most cases the term will be short – usually around 30 days. If you purchase new construction, your credit reports will be examined periodically for the entire construction timeline – usually four to five months. Any and every change to your credit score could derail your plans to buy your new home. Once you’ve contracted to buy a home, be very careful that you don’t do anything that could drop your credit score. This includes buying a car or a boat, running up a credit card balance, opening or cancelling credit card accounts, making late payments or missing payments. While your credit is under the microscope, take great care that nothing happens to damage it.
If you have any questions about how your credit reports and credit scores can help you or hurt you when you’re buying a home, don’t hesitate to call Betsy Saxon at 912-663-2510. She’s successfully counseled hundreds of buyers who have needed help getting their credit ready to purchase the home of their dreams. She’s happy to provide an incredible amount of free information to anyone who requests it!