We have seen it happen more times than we care to admit—a buyer finds their dream house and asks one of our talented CBI agents to represent them in the transaction. That’s great, as we specialize in helping both buyers and sellers, however, the plot thickens when a buyer’s credit history is bit murky.  Mortgage pre-approval is an important part of the home buying process, yet so many starry-eyed potential homeowners fail to realize their past credit history plays a crucial role in turning a dream into reality.  In this week’s article, we will provide some helpful guidance to help you get your credit report in shape before venturing into the home buying market.

The Credit Reporting Companies That Hold The Key To Your New Home

There are three major credit reporting bureaus that act as the gatekeepers between major lenders and your ability to get a decent interest rate: EquifaxExperian & TransUnion Each of these companies receives documentation periodically from a wide variety of creditors; everything from basic utility companies, student loan lenders and credit card organizations. Any business that requires you to send payments is fair game to be included in your credit report—even private landlords that collect rent.

Each of the above credit reporting companies will provide one free credit report every year to help you gauge your personal credit’s health. Many homebuyers will request one report from one company every four months. For those who are interested in more frequent information regarding their credit, additional reports can be purchased.

The Range Of Your Credit Score

Below is a sample list of credit scores as well as what one can typically expect to experience from mortgage lenders:

  • 751 And Higher: You can expect to get the most competitive, lowest interest rates available.
  • 750-711: Very good: You’ll still be eligible for competitive interest rates.
  • 710-651: You will be granted credit from most lenders but at a higher interest rate.
  • 650-581: In this range, the quantity of lenders is fewer with the interest rate becoming considerably higher
  • 580-300: You’ll likely have a very difficult time finding a lender, and if you do you can expect to pay extremely high-interest rates.

How Can I Improve My Credit Score?

If you’ve found yourself with a credit score of anywhere from 710 down to 300, there are several ways you can improve your situation:

  • First, you must make certain you’re paying all of your bills on time. Late payments, just like on time payments, are recorded by the credit reporting companies. Even a brief history of late payments can negatively affect your score, just as several months of diligent on time payments will bode well.
  • Pay down your credit card balances, keeping them low—but not necessarily paid off! You will want to select one or two credit cards and use them frequently for everyday purchases. Try to keep your credit card to debt ratio at around 30%. The best strategy is to use your card, then make multiple payments per month; this way you’re paying down your card, not carrying a balance, but still having some of your credit used at any given time. No one knows when creditors send their data to the credit reporting agencies; they love seeing that you’re using your credit line wisely, not just letting your account collect dust.
  • Go over your credit report thoroughly! It’s not uncommon to find reporting errors that are lowering your credit score. With documentation (proof) in hand, call the credit reporting companies and ask them to make the required corrections.
  • When reviewing your report, you may find that some older loans which you’ve paid off still appear on the list. That’s a good thing! Resist the urge to have the reporting companies take these off your report, as this information actually bodes well for your credit score; it shows you had loans (student loans, auto loans, etc.) that you paid off, proving you are a reliable borrower.
  • When applying for a mortgage loan, do your homework first! Every time you visit a lender and they run a credit report it will be documented by the credit bureaus. A sudden increase in credit checks will be noted and can result in lowering your score.

Our advice to potential new homebuyers? Make sure your credit is in decent shape before looking for your dream home. If you find room for improvement, take steps to increase your credit score before seeking mortgage pre-approval.  You may be pleasantly surprised by how little time it takes to really get your credit score in shape, resulting in a better interest rate which can save you a great deal of money over the life of your loan!

If you have any more questions regarding purchasing or selling a home, don’t hesitate to call us  301.745.1500, we’re here to help!