Understanding your credit rating or score is not as confusing as it might seem. It’s actually pretty straightforward. This is the most important criteria that is used in determining your ability to qualify for a loan. Unless you are paying cash for the property or having the owner hold the mortgage, you will have to abide by the credit reporting rules and how they score you. Knowing your credit score is the first thing you find out when you are considering buying a home. If your score is not high, enough there is no point in moving forward in the home buying process until it is. So let’s get on to understanding them.
When you apply for a home mortgage, the lender first runs your credit report. It is called the Three Merge Report, meaning it uses a merged report from the three main credit reporting agencies. It is different from the report when you apply for an auto loan. For auto loans, only one agency report is used. The Three Merge Report is a combined report of Equifax, Trans Union and Experian. All three bureaus are combined into one, duplicates are removed and you are given a score by each agency based on their information only. The lender assigns you the score of the middle one. So you might have a 680, 630 and 650. Your assigned score is 650. Period…end of discussion.
Your score is derived from your bill paying history of bills that report to the agency. Typically car loans, credit cards, student loans, and now even child support. Normally, bills such as phone bills, gym memberships and personal loans are not reported. Based on your timely or untimely pay history, your scores may range from as low as the 300′s to as high as the 850′s. Additionally, things such as charge-offs (loans a creditor has given up on trying to collect and has charged them off their accounts), collection accounts, bankruptcies and judgments are also taken into account. You may not even have a score if you have never had any credit reporting accounts.
For you to be eligible for a home loan, you must at least have a score of 600. There are a few agencies that can help you get a loan if your score is below that, but the restrictions for those loans are severe and basically only apply to very low income families. As I said 600, is the minimum score and even that score is only eligible for certain loans such as a 1st time state buyers program underwritten by FHA guidelines. For all practical purposes, you have to have a 620 score to do anything and lenders are moving that minimum up to 640 regularly and those only apply to FHA and VA loans. For any kind of a conventional loan (click on different types of loans) the minimum score is 660 or above.
If your score is high enough for a loan, then the only other concern is outstanding collection accounts and judgments. If the type of loan you’re going to utilize is a FHA or VA loan, you will have to settle all outstanding collection and judgment accounts. Period…end of story. If you are doing a conventional loan, there are more leniencies.
If your score is not high enough for a loan, you will have to do credit repair until it is. For credit repair (click on credit repair). Sometimes it will take as long as 12-18 months to get your score high enough, depending on how low it is and why it’s that low.
If you have no score or only one score, then the lender can look at alternative forms of credit such as utility bills, telephone bills and other verifiable but non-credit reporting bills.
Do not be afraid of your credit score. Knowing it is far better than not. Knowing your credit score allows you to work on it and quite often, there are inaccuracies on your report. When these inaccuracies are corrected your score will go up shortly. Knowing it also lets you know with confidence when you will be able to buy.
If you would like to know your credit score or what it means to you, email me. I will be happy to sort through it with you and get you started on the path to home ownership or let you know if you are ready to go. No charge or obligation.