I have to admit that I'm kind of surprised when I begin working with a buyer and they truly don't know their FICO score or much about their credit at all. I've worked with several buyers that assured me they were pre-qualified by a mortgage lender only to find out that they weren't. These buyers just figured they could buy a house. When I had them speak to one of my lenders, they had to clean up their bad credit.
The first thing you need to do before looking at homes is to check on your credit. It's not a good feeling when you fall in love with a house only to find out you can't get a mortgage on it. You put time, effort and emotions into house hunting and it really hurts when you find out you are not creditworthy to buy, after you've found the perfect place.
You might get approved, but if you have less than stellar credit, you could be paying higher interest rates. This can really add up over the years! It could also cost you extra upfront if you are allowed to "buy-down" points to get the interest rate reduced.
For example, if you have a 30-year fixed-rate mortgage of $100,000 and you get a 3.92% interest rate, the total cost of your mortgage will be $170,213. However, if your interest rate is 5.92%, you’ll have to spend $213,990 for the same mortgage - that’s an extra $43,777 over the life of the loan! If you had secured the lower mortgage rate because you have good credit, you could use that additional money to fund a four-year college degree at a public university.
The following are some ways to clean up your credit:
1. Call one of our mortgage lenders
Our loan officers can tell you what your current FICO score is and they'll advise you on how to raise it if necessary. This might be paying off judgments, paying off outstanding loans, paying down credit cards, etc. They will normally do this at no cost to you.
2. Develop better financial habits
Do you pay your bills late? Do you only make minimum or less-than-minimum payments? If you're trying to clean up your credit, you need to start paying bills on time and reduce your debt as much as possible.
Your FICO score is generated using 5 different categories, according to MyFico as follows:
- 35% is your payment history. This is the largest segment so it is the most important. Pay your bills on time!
- 30% is the amounts owed. Every type of mortgage (VA, FHA, conventional, etc.), has a ratio of debt-to-income. This is also a part of how your FICO score is determined. They want to make sure you're not overextended.
- 15% comprises your length of credit history. A longer credit history can help increase your FICO scores, but it all depends on the other factors. In other words, a younger person with a fresh credit history can still have a high FICO score if everything else is good in these categories.
- 10% is your credit mix. It's good to have different sources of credit, like a charge card, a car loan, prior mortgage, etc.
- 10% is new credit. They don't want to see that you've opened multiple credit lines recently and in a short time period.
3. Check your credit report's accuracy
If you feel your FICO score should be higher because you feel you've paid your bills on time and are in good standing, review your credit report to make sure there aren't any errors on your report. If there are, you need to take the proper steps to correct them. Some errors can include:
- Incorrect personal information such as name, current address, social security number, and birthdate.
- They can have your current address correct but might have an incorrect prior address that is really associated with someone else.
- Current and past employment can be incorrect so double-check.
- They can sometimes mess up on marital status and if you are remarried and have credit established with your current spouse, they might have past credit with a prior spouse that can hurt you.
4. Make sure your public records are correct
Your public record section will show lawsuits, judgments, tax liens, and bankruptcies. If you have any of these records, make sure they are accurate and that they were filed by you. Lawsuits or judgments shouldn't be older than 7 years. If you've paid something off and it is still showing as a balance due, you'll need to correct this.
5. Your credit accounts
Go through the list of credit accounts to make sure they are all yours. If your spouse is solely responsible for an account, have it removed from your credit report.
This is where you can make sure you're not the victim of identity theft. Also, if you closed any accounts, make sure it is written somewhere that you closed them, not the entity that gave you the credit account.
6. Credit inquiries
Make sure there aren't any inquiries that should not be listed, such as car shopping (where you didn't purchase a car), or for credit you didn't ask for. Get those removed from your report.
7. Report disputes to the credit agencies
Although you can send letters to the different agencies that might have incorrect information, you should be able to do it online on their websites. This is for the big 3 - Equifax, Experian & Transunion. They will have instructions on how to file.
However, if there are more minor items that need to be removed, such as judgments or liens that have been paid off or are older than 7 years, you will probably have to go directly to those lenders to get them removed.
8. You'll need to follow-up
Keep checking up to make sure any disputes have been resolved and either edited or removed from your credit report. Make sure all 3 credit reporting agencies have everything fixed and up-to-date. You might still have to go back to the original lenders that gave you the credit if the credit agencies cannot get them to update your information.
The best thing to do is to review your free annual credit report prior to a large purchase. Do this in advance to give yourself time to fix inaccuracies. It can take months to make corrections and to have them finally appear correctly on your report. Take advantage of that free annual credit check!
9. Call me to get started
I work with some wonderful lenders and loan officers. As I mentioned, if they pre-qualify you and decide you need to work on your credit, they will tell you what you need to do.
I had a buyer on one of my own properties who used an online mortgage "provider" that sent her social security number to multiple lenders. Normally, you can have more than 1 or a few mortgage inquiries in a short time period without your credit being affected. But her inquiry must have gone out to so many lenders that pulled her credit at different time frames that she was 30 points less than the minimum she needed to get a mortgage. Her new lender, that I suggested she call, told us that her credit should straighten out in 30 days. It did, and we liked her so we waited for her.
Be careful with online-only lenders! We use local lenders who do have websites and might want you to apply online, but they are not a 3rd party lender hub that is going to share your information with multiple mortgage providers. Give me a call at 708-536-8200.