Every day the question is posed, "What do I need to do to get financing?" The newspapers and the newscasts make it appear that it is almost impossible to get a mortgage these days. In reality, it isn't impossible, it just means that you have to be better prepared before you go looking at houses.
The hardest part to grasp is your own credit. You'll need to know exactly what your rating is and what affect that rating will have on getting your mortgage approved and at what rate. If it's less than perfect, now is the time to make the corrections needed before you apply for a mortgage. There is only one free credit report website that you should check. www.annualcreditreport.com. This is the web address set by Congress so that you can check your credit once a year for free. Start with this report. There are no "hits" on your credit score if you pull your own report. That means your score will not drop just because you decided to look at your report.
Know the difference between a raw score and a weighted score. When you pull your credit report your self, the scores you may receive are raw scores and may actually differ by as much as 100 points from score that a mortgage company will see. The reason is that the mortgage company places more weight on certain parts of your credit report. For example, the mortgage company report may weigh a car payment's history much heavier than a gas card. The reason is that the mortgage company wants to get an idea on how you pay your long-term debts. When you pull your own credit report, the report will just state your balances and your payment histories as if they all were the same type of credit.
There are three major credit bureaus in the United States. They are Experian, Trans Union, and Equifax. They operate under different ways but handle the credit data similarly. Meaning that one may use your name and address to match your credit history to your name, another may use your name and social security number to match your credit history to your name. None of the credit bureaus actually changes your data. Their only function is to collect exactly what is sent to them by the loan companies, credit companies, and finance companies. It's really like the old saying, "garbage in-garbage out." They cannot change your payment history or your balances; they can only report what was sent to them.
When a mortgage company pulls a credit report, we must pull all three major bureaus and merge the data together on one report. Sometimes this is relatively easy, sometimes the information gets a little jumbled. This is usually the time I have to ask you what is the real answer. Have your monthly statements handy.
Credit scores for the most part go between 350 to 850. The higher your score, the better your credit rating. The better your credit rating, the better programs there are available to you at lower interest rates.
Credit bureaus use a mathematical formula for figuring out your score. Based upon certain criteria, the scores reflect how much of a risk you are and the likelihood that you would pay back the loan. These scores can change every day. Since each bureau collects your data, you could have three or more scores. This is important to understand. Your scores change every time a creditor reports your history to the bureau. Most of the time the credit bureaus collect the data by the first weekend after the first week of the new month. The larger creditors may send their data periodically during the month. Your score today could be drastically different from the scores pulled just last week.
The scores are added and subtracted according to points. You get good points for having a credit card over 12 months. You get more good points for never being late. You get even more points by never going over 50% of the allowable limit and the most points by never going over 30% of your limit. However, paying any debt late can have drastic effects. And it doesn't matter if it is a mortgage payment, car payment, or credit card bill. This could mean a 70 point reduction in your score just by paying something late. Collections and judgments have a very bad effect on your score.
Here's the secret for getting and maintaining a good credit score. The score only looks at your credit history over the past 24 months. Anything older than that has a very minimal effect on the scores. While maintaining a good history on an installment loan like a car payment or student loans is great, it doesn't add good points to your score. If you're late on an installment loan, you will lose points though. Revolving credit cards, like department store, VISA, etc... provide the biggest boost to your scores. Having at least 4 of these cards open and in-use periodically while never going over 50% of the limits is the ticket to a great score.
Quick reference: 1. Never pay anything late. Keep track of what you are spending and make sure that limit is always within your means of paying it off on time. 2. Never exceed 50% of the limit on your revolving credit cards. If you know that may happen, it is always better to open another account and spread out the debt. 3. The longer you keep your cards open and in use, the higher your scores will rise. The opposite is true as well: Closing out a revolving account in good standing will always lower your score! Never close out a credit card in good standing. 4. Unlike your parent's advice: Having a lot of credit cards is not always a bad thing. The more credit available to you means the higher your score will rise. The reason is simple: If you get into temporary trouble, you will have lots of ways to pay back your obligations on time using that available credit. More often than not, mortgage companies want to see that you have a good credit history on at least 4 credit cards longer than 12 months.
