A credit report is among the usual topics of discussion with prospective buyers especially when the home purchase is only possible via a mortgage loan. It is also among the most important factors that make a big difference even before the buyer decides to pursue such a big purchase. But not everyone understands the impact of not having a well-established credit history in their ability to apply for a loan.
It’s crucial to know what needs to be done first and foremost when buying a home. Getting approved for a loan is typically on the top of the list. It’s highly recommended for first-time homebuyers to study the benefits of having good credit to understand how it affects their life in general. The hosts of the B&L Consumers Real Estate Radio Show that aired on January 25, 2020, stressed to their 20,000+ audience, “Know What You Are Doing”. Guest speaker Del Vanessen, a Colorado expert lender in Community Banks Mortgage, talks about one of the most important things that first time home buyers must know, their credit-worthiness.
Here is the radio show recording as Barry, Larry, and Del discuss the importance of knowing your credit standing beforehand. In fact, it will be beneficial for every buyer to know it months or years ahead before considering a home purchase:
Why Lenders Require Established Credit History?
Most home buyers will do their own research and educate themselves when they start to think of buying a new home. While some of them skip getting a buyer’s agent, they also tend to least prioritize checking their credit history. Basically, credit history is an individual’s capacity in repaying debts on time. But not until they decided to buy a home when they realize that in order to successfully purchase a home they need a good credit history. Lenders want to learn about you before they lend you money, they review your credit history then they decide whether you will be approved for a loan or not. With a bit of knowledge, you can save yourself from having a bad credit score.
To give you an idea, building a credit history is not an overnight process. It takes time, consistency, and hard work. An individual should continue taking financial debts and pay them on time. They should also check their credit history ahead of time to know where they stand prior to a big purchase. This way, it will give them a high chance of getting the best terms and interest rates with loans.
A credit report will show a summary of your credit history that includes the following information: your name, address, and Social Security number, credit cards, existing loans, how much money is owed, and if a consumer pays bills on time or is delinquent.
Benefits of Regularly Checking Your Credit Report
Reviewing your credit history periodically as well as maintaining a good credit score is vital in having a smooth home buying process. It shows that consumers who plan on a big purchase ahead of time are less likely to run into financial trouble later. As many buyer agents will require at least a pre-approved mortgage loan before showing properties. So, don’t delay in checking your credit. Here are the benefits of checking your credit report ahead of time:
- Rebuild or maintain good credit. This is the best chance to know if you are in a good shape. Paying bills on time and paying off debts are some ways to rebuild credit score. Having a stable income and the length of time you have been employed also contributes to a good credit standing. Lenders look into this to determine your eligibility for credit. Also note that if your credit report shows a score of 740 and above, it increases your chance of getting the best terms and interest rate or getting your loan approved faster.
- Manage personal finances. A good way in managing your personal finances is to make sure that you keep track of all types of spending and reviewing your bank statements. Finding mistakes on a credit report is very common, hence, this will let you know if there are any invalid credit entries. An early review allows you time to file disputed items. Here’s a good example of how something that seems insignificant can have a huge impact on credit scores- one of our buyer agent’s clients was not aware that returning a book late resulted in a debt collection of $10. That small amount pulled their score down by 75 points! It’s a huge decrease for a small amount that could have been easily prevented had they checked on their credit report earlier or on a regular basis.
- Identify inaccuracies. Monitoring your credit report regularly gives you a chance to review any inconsistent and inaccurate information as these factors can impact your credit score and may affect your future plans in getting a loan for a home purchase. It will also protect you from fraud and can alert you to errors.
Tips To Build or Maintain Your Credit Score
How do you establish a good credit history? Take serious notes of the following tips as these could help you secure a good credit score:
- Establish a good employment history and work on a steady income. Lenders like to see a good cash flow because that basically shows promise in the ability to repay a loan.
- Research and continue to educate yourself about what affects your creditworthiness. Also, be sure to check the upcoming changes that FICO will implement with the way it determines credit scores. According to NPR.org, FICO changes the credit scoring system every five years or so. It also reports that scores will typically decline for people in the lower FICO score range, about 580 and below. Now that’s all the more reason to request your credit report as soon as you can.
- Spend responsibly. Here are a few tips from reputable banks and lenders to bring your credit score ready for your home purchase:
- Pay debts on time every time. Unpaid dues and late payments can cause a big drop in your credit score. A great way to avoid this is to pay your balance in full every month. Doing that will also save you from paying interest fees.
- Keep an established credit history. Do not close old accounts. Ask your bank to issue a new card while keeping your credit history, instead of closing your old accounts.
- Maintain a low outstanding balance. Do not be persuaded into buying stuff like furniture on sale just prior to the home purchase. It’s easy to be attracted to these sales because of 0% interest rate offers, but keep in mind that there will always be another sale after the home purchase is made. Avoid anything that will add more to your debts and strictly keep your balance below the minimum. Financial experts advise using only 30% or less of the amount of your account’s available balance. By doing this, you are able to show that you have good control over your finances.
- Seek financial expert advice. This is most especially if you have plans to venture into a big transaction such as a home purchase. Consult a financial expert to review where you are. And then seek proper guidance to establish or improve your cash flow and credit standing.
When To Check Your Credit Report
Equifax is among the 3 major credit bureau agencies. It believes that there is no “One size fits all” when it comes to credit report solutions. Everyone has their own unique financial situation the same goes for the lenders. But if there is one common thing it will be awareness and education. The more knowledgeable you are the better you’ll manage your finances and get a good credit score. Therefore, Equifax suggests that it is best to check your credit report at least once a year.
The Best Guide For First Time Home Buyers
Whether you are a cash buyer or you need a loan, your buyer agent can recommend local financial experts. The Colorad0 buyer’s agent Association Service offers free consultations. Take advantage of this free service anywhere in the United States, Canada, and Costa Rica. Simply communicate your needs by filling out the online form and the team will contact you back in no time. Get access to top buyer agents by calling 800-383-7188 or 866-222-8937. The service is open Mondays through Sundays and you can talk with any of the staff or Kathleen Chiras, the association manager herself.