If you are thinking about purchasing a home, your credit is important. There are some things you can do to make sure that you are credit worthy to purchase your dream home.
First, find out what your credit report says. You can review your credit report for free at www.annualcreditreport.com When reviewing your credit report, be sure to look for errors, such as:
- Any collection or charge off accounts that are reported as outstanding, but have been paid
- Payment timelines for errors or late payments
- Pay history for current and paid in full accounts
If you find errors in your credit report, you should contact all three credit bureaus:
- Trans-Union 800-916-8800
- Equifax 800-846-5279
- Experian 888-397-3742
You may be able to dispute an error online or via written request. Sample dispute letters can be found here: FTC website
Next, find out what your credit score is. You can do this through one of the credit bureaus or at myFICO. Your FICO score information is weighted based on payment history (38%), amount owed on revolving accounts (33%), credit history (18%), and new credit accounts (11%).
Payment history involves the number of accounts that are past due or delinquent, compared to the number of accounts you have in good standing. A lengthy credit history will generally increase your score, though if you manage credit responsibly, you can get a high credit score with a short credit history.
Financing your new homeThe amount owed on revolving accounts (credit cards) should remain below 30% of the credit limit. HELOC’s (Home Equity Line of Credit) can also be considered revolving accounts, as well as student loans. The number of accounts reporting a balance can indicate that you are over extended.
FICO will not generate a score if the creditor’s file has been dormant for over 6 months. If a person becomes an authorized user on an existing account, it may add credit history to your file and boost the FICO score.
Don’t open new credit accounts prior to applying for a home mortgage, and don’t charge while waiting for your loan approval. FICO scans the credit file and searches for open dates within the last 24 months and compares these to the established accounts.
If you have a bankruptcy, the first 24 months have the most impact. The Statue of Limitations on a Chapter 7 is 10 years from your discharge date, and 7 years on a Chapter 13 filing. The best thing you can do is to get a secured credit card from a local bank or credit union, and maintain a balance lower than 30% of the available credit limit. Be sure to make payments on time. You can apply for a conventional loan after 4 years on a Chapter 7 filing, and 2 years on a Chapter 13 filing. Multiple bankruptcy filings are 5 years if you have more than one filing within the past 7 years.
The jury is still out on how foreclosures will affect your credit and ability to obtain a mortgage. With the large number of foreclosures since 2008, there will be new rules and trends on borrowers’ ability to get a home mortgage after a foreclosure or short sale.