Credit

Credit preparedness

If you are serious about buying a home it is important to understand the important difference between pre-qualification and pre-approval. In markets where there is limited inventory, sellers want offers from pre-approved buyers, as getting pre-approved takes time and there is no guarantee that waiting for a buyer to go through a comprehensive credit review will result in pre-approval. So if you are serious, be ready with a pre-approval letter.

Pre-Qualification

To pre-qualify for a mortgage loan, you meet with a lender and provide information about your assets, income and liabilities. Based on that information, the lender will roughly estimate how much money you can borrow. The entire process is informal. The lender does not verify the information provided, usually provides this service without charge; however, they are not formally agreeing to approve a mortgage for the amount you are pre-qualified to borrow.

While the pre-qualification process does not guarantee loan approval, it does give a general idea about how much money lenders are willing to provide you. This gives you a number to work with, helping you decide whether you are willing and ready to borrow that much money, and to see which types of properties are within your price range.

Pre-Approval

The pre-approval process is a formal pre-qualification process. With pre-approval, the lender checks your credit, verifies your financial and employment information and confirms your ability to qualify for a mortgage. Pre-approval strengthens your position to make an offer when you find a property that you like – sellers are generally more willing to accept offers from pre-approved buyers, who have already shown that they can actually afford to purchase the house.

 The Consumer Financial Protection Bureau has created several resources to  help you as you navigate the mortgage process.Some of the new resources include: The Loan Estimate which makes it easier to shop around and compare loan offers from multiple lenders, and it includes definitions for unfamiliar terms. And, The Closing Disclosure helps you avoid costly surprises at the closing table. You can use the interactive sample form from the Consumer Financial Protection Bureau Website to help you compare your Loan Estimate to the Closing Disclosure and make sure that you understand the reason for any differences.

For many homebuyers, credit is a big consideration in securing a loan. Many loans are insured or guaranteed by government programs which offered by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Department of Agriculture’s Rural Housing Service or Farm Service Agency (RHS/FSA). All other loans are classified as Conventional.When applying for a mortgage, your credit may be the single factor when purchasing the home you want at a low interest rate. You may be confident that your credit rating is sufficient but have never actually seen your credit report. Or perhaps you’re concerned previous issues with credit will affect your ability to secure a home mortgage.

What ever your circumstances, the first step is to 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: Experian, TransUnion and Equifax. You might consider obtaining your credit report from all three agencies, as each may contain different information and you cannot predict which agency will be supplying information to your lender.

If you find incorrect or missing information that would improve your credit score, you can 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, having this information before making your mortgage application is worth the nominal fee.

What is credit?

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 as agreed).

 What is a credit score? 

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.

What role does credit play?

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.

 What do I do when I get my report?

Read through it carefully, paying extra attention to the section on your account payment history.

 How do I establish credit?

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.

 How do I re-establish good credit?

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.

How do I correct a mistake?

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.