Real Estate Education: Buyers Article 3
Step Two: Your Financial Profile
This is the second in a series of real estate articles for people in the Hingham area and the South Shore of Massachusetts who are starting the process of purchasing real estate. Some of the steps vary, depending on whether this is your first time buying a home, or if you are a home buying veteran.
It is easy to fall in love with the idea of buying a home, and certainly more pleasant than sifting through documents and assessing your financial standing. If you are reading this real estate article, you might have the home you want planned out in your mind’s eye. Before the fantasy becomes reality, preparation and organization are prerequisites, some more lengthy a process than others. Your priority during this early stage is to see yourself through the lender’s eyes so as not to be caught off guard facing a stranger who knows more about your finances than you do.
Money lent always comes with multiple strings attached, and anticipating each string will put you in a much better position when it comes to time to apply for your home mortgage.
If you are a first-time home buyer, not only is all of this information new to you, but you have a different set of details that need attending to up the road, namely where your down payment is coming from and developing a budget. This will be covered in an upcoming real estate article. No matter what, unless you are paying for a home with all cash, you are obligated to assess your financial situation.
It is easy enough to skip this step and assume that your chosen lender will pull your credit report and gather all the appropriate documentation. Although lenders do exactly that, they cannot advise you. After all, a mortgage company is selling you a product.
Understanding how you will be viewed by mortgage lenders and preparing your finances for a real estate transaction can be a daunting task. I hope that by educating you, a little bit at a time, you will feel less burdened by some of the more arduous tasks.
When was the last time you checked your credit score or reviewed your credit report? Don’t worry if you never have because you are among the majority. That is about to change because the best place to gather information about yourself is your credit history.
Your personal credit report contains details about your financial behavior and identification information. Different companies collect and organize data about your credit history from your creditor’s and public records. Creditors then forward this information to the three credit reporting agencies on a monthly schedule. Your credit reports are always available to prospective lenders, employers and others, but also to you! Under federal law you are entitled to a copy of your credit report every twelve months.
You can take several different approaches to getting your credit reports. There are an overwhelming number of Web sites devoted to this task. Many people currently use a site called CreditKarma ( https://www.creditkarma.com ) since they tend not to inundate people with emails and ads. It is a simple and free way to find out where you stand. This site offers free credit scores, reports, monitoring, and some tools to help you understand it all. Additionally, they have a home affordability tool and a loan calculator to help you outline your financial future as a new home owner. ( https://www.creditkarma.com/tools ) They do ask for your social security number since this is the standard identifier credit companies use to assign your data. CreditKarma is an Accredited Business with the Better Business Bureau, they have a TRUSTe certification, and 256 bit key encryption to provide a high level of security to protect personal and sensitive information. This being said, breeches happen all the time, so always keep in mind that no matter how confident one person is about an online service regarding finance, something could go wrong.
An alternative is to use one of the three credit reporting agencies, which are: Experian ( http://www.experian.com ), Equifax ( http://www.equifax.com/home/en_us ) and TransUnion ( https://www.transunion.com ).
These agencies will request reports from the others so it is only necessary to contact one agency. When you receive the reports, the credit should be in the same range, even though each uses different sources. For example, Experian considers on-time rent payments while TransUnion has detailed information about previous employers.
Lastly, if you have recently been turned down for any type of credit, you may qualify for a free report. Contact the credit company that denied you service and request the name and contact information of the credit bureau from whom they obtained your information. You can then contact this credit agency within 60 days, using the information they provide to obtain your free credit report.
Without good credit, a home loan is almost impossible to secure. What is a good credit score? The score is a three digit number calculated from years of data collected regarding your payment and credit card or loan history. It is the main factor used by mortgage lenders to determine your creditworthiness. Your credit score affects whether or not you are approved for a mortgage and what interest rate you are charged. A good credit score is considered to be 720 or higher. Keep in mind that lenders have their own individual criteria for what they consider to be a good score.
Mortgage lenders use the FICO credit score in particular. The higher your credit score, the more opportunities you will have to procure a mortgage, and the more flexible terms you will have. The Federal Housing Administration requires a minimum credit score of 580 for a 3.5% down payment, while conventional mortgage lender typically require a score of at least 720.
Once you become accustomed to reviewing your credit report, you can work towards always building the score. This will ensure a more favorable interest rate for you. To monitor your credit report from each of the three credit reporting agencies on an ongoing basis you can use any of the three credit agencies. They all offer credit score monitoring.
9 Solutions to Increase Your Credit Score
Unfortunately, there are no short-term fixes that will raise your credit score. And the very things that drag down your score will stay on your credit report for up to seven years. Your credit profile is based on historical information and financial habits so tipping the scales in the right direction requires positive data ton a timeline to offset any negative information form the past.
Here are 9 things you can do to start helping an ailing credit score:
1) Check for errors and dispute them! It can be unnerving and incredibly frustrating to have errors on your credit report. But this does happen on occasion, in fact, a 2013 Federal Trade Commission study found 5% of credit reports contained errors . There is no way around the remedy for someone else’s mistakes and that is to dispute the errors. To do this you must send a dispute letter with all of the documentation you have on the matter. You also need to contact the organization that made the mistake and ask that it be updated with the credit reporting agency. There is no sense biting your nails while you wait for the fic since the updating process takes a while, but once the problem is resolved you will most certainly see a change in your score. Be wary of credit repair companies who say they can remove all the negative information from your credit report. If you are considering a company like this check with the Consumer Financial Protection Bureau and the Federal Trade Commission first.
2) One action under your control is to make sure every credit card bill, rent check, car payment and other debt is paid in full and on time, for one year prior to applying for a home loan. Since 35% of your credit score relies on your payment history, take control of that now. The sooner you change your payment habits, the sooner your credit score will rise up in the ranks. Some people opt for automatic payments to guarantee the payment will be where it needs to be on time.
3) Ask for forgiveness if you have one or two late payments. Believe it or not, you can call the company that registered the late payment and ask it to be removed from your credit report If you have a longstanding history of lateness, they will not consider taking your late payments off the record, but many companies understand forgetfulness or life events interfering with your ability to make payments in a timely fashion. You can certainly start with a phone call, but credit companies almost always want a letter of detailed explanation for your file. In your letter write about your positive track record, and make a case for yourself. If you do not hear anything after one month, follow up with a call. Keep in mind that no company is obligated to forgive any late payments.
4) If you are able, plan a more aggressive schedule of paying off your credit card debt. The faster your debt is paid down (providing you are not re-spending), the faster your credit card utilization rate drops. The rate that creditors prefer is under 30 percent. You can ask your credit companies for this information and also ask how much you need to pay down before you are below that 30 percent mark. It is well worth considering a withdrawal from your savings account to get this part of your credit in order before purchasing your first home.
5) See about a higher credit limit. By increasing the amount your are allowed to borrow, your debt-to-credit ratio, increases too. This is a simple comparison of how much you owe to how much you can borrow. Credit card companies review credit limits, but it cannot hurt to request a review, especially if your record for on-time payments is good. Give your credit card company a call to ask by locating their number on your most recent statement, or on the back of the card. Once you reach customer service, explain your reason for the request, and don’t be at all surprised if they ask for more personal information such as your current income. Be sure that all of your financial obligations have been meet regularly for at least 6 months, if not longer.
6) Apply for more credit cards. This sounds crazy at first glance, but actually many credit card companies offer introductory balance transfer rates. If you transfer all or some of your other cards’ balances, you end up paying little to no pay little or no interest on balances that are transferred. Usually the introductory period lasts one year. Be sure to read the fine print because there is often a one-time fee involved, and if you fail to pay off your balance transfer during the introductory period, you’ll have to pay interest on the entire transferred amount.
7) Make sure you have tradelines. Tradelines are any combination of credit cards or loans. Conventional mortgages require that you have at least three tradelines that have been active within the past year to two years. FHA loans require two tradelines. Without these you will not qualify for a mortgage. If this is a concern, apply for a new major credit card at least six months before applying for your mortgage. Use this card for purchases you would normally buy with cash or debit.
8) Even if you are opting to transfer balances, be sure to leave older credit lines open. The more seasoned credit company account boosts your credit score. If those cards sit dormant at the back of a drawer take them out and dust them off every few months to use them.
9) Be mindful of your debt utilization ratio going above 30 percent before closing on a new home. This can actually disqualify your loan. This means waiting to order new furniture for you home, taking out a new car loan etc.
Although most home-buying memories are highlighted by negotiating the final offer, and finally stepping foot inside a new home, preparation and organization are what get you there.
As always you can feel free to contact me with questions about real estate, selling your home or looking at houses to buy. I am always available for calls or text messages on my cell phone at 781-724-7622, and you can also email me at firstname.lastname@example.org.