Applying for your first home loan can seem scary or daunting to many first-time homeowners. However, this process, if done correctly, can save you thousands or tens of thousands of dollars on interest over the lifetime of your loan.
Before you apply for a loan, there are several documents you’ll want to gather and steps you’ll want to take to ensure the application process goes smoothly. In today’s post, we’ll talk about one specific aspect of the mortgage application process--credit scores.
Credit scores may seem confusing. However, since they can so drastically affect your home loan interest rate, it’s important to understand their implications.
One of the things that all lenders will want to see before approving you for a home loan is your credit score. If you’re thinking of applying for a mortgage, odds are that you’ve been working to build credit by paying off loans and credit cards on time each month.
The three main credit bureaus in the U.S. are all required to give you a yearly free credit report. This is a detailed document that outlines your lines of credit, payment dates, and amounts. It’s a good idea to get a detailed credit report and check for errors before applying for a loan.
Unlike a hard “credit inquiry,” a free report does not affect your credit score, so you don’t have to worry about dropping a few points by requesting one of these reports.
When applying for a mortgage, however, lenders will perform a hard credit inquiry to determine your borrowing eligibility. This is a part of the pre-approval process and is typically unavoidable.
This is important to note if you are planning on applying to multiple lenders. Be aware that each “prequalification” and “preapproval” may come with a temporary drop in your credit score.
Since credit inquiries make up a total of about 10% of your credit score, these inquiries can make a difference in the short term. For this reason, it’s a good idea to avoid opening new cards or taking out other loans (such as an auto loan or student loan) within six months of your mortgage application.
If you aren’t sure of your current score, you can always check for free from websites like Credit Karma and Mint.
One last thing to note about credit scores and their relationship to mortgages is that most lenders use a specific type of score known as a FICO score. In fact, every adult in the United States with a credit score will have three FICO scores, one from each major credit bureau.
So, when checking up on your credit score, it’s good to remember that each score will be slightly different and your lender’s score may not reflect what you see online.
Your credit score is one of the most important numbers to your financial picture. You know how important it is to have a high credit score. If you pay your bills on time and keep your debt down, you think that your score will be just fine, but this isn’t always the case. There are a few hidden mistakes that you could be making that are bringing your credit score down. Read on to find out what to avoid when trying to keep your credit score up and maintain it.
Too Many Credit Inquiries
Beware that every time you apply for a new loan or even just check on what type of interest rate you can get, your credit will be reviewed. You want to avoid too many credit inquiries because a high number will bring your credit score down. Always ask if a lender is pulling a hard inquiry to check your score, don’t allow too many of these credit checks.
Anything Small Can Make A Big Impact
Was there a mistake on a medical bill that you paid but it says it was unpaid? If you let this go, your credit score could be impacted. Even unreturned library books that have been turned over to collections can negatively affect your score. Stay on top of things because you never know how a small mishap can affect you.
Your Information Is Wrong
You should look at your credit report so that you can see more than just your history. You can see the information that is being reported to check for mistakes. Incorrect information can bring your credit score down. You can call the credit bureau that’s associated with any errors that you see on your credit report. It can be a little bit of a process to correct the mistakes on your credit report, but the time and effort is definitely worth it for your credit score.
Not Using your Credit
While using your credit too much is a problem, not making use of your credit at all can be a problem. Responsibly use your credit. Open a credit card and use it to make small purchases. Charge only things that you can afford and pay the balance off each month. This simple use of a card is one of the easiest ways to establish credit.
It’s important to do what you can to develop and maintain a healthy credit score. Keep all of your avenues covered to be sure that nothing hidden can negatively affect your credit score.
If your credit score could use a boost it isn't as simple as just changing bad financial behaviors. Increasing your credit score is a process that takes time. The time it takes to improve your credit history can vary. Late payments can remain on your credit report for seven years, but typically if you clear all past-due debts and pay on time from then on, your score can begin to recover quickly. One late payment doesn't hurt you that much but a pattern of bad payments will really hurt you. If you have a few late payments continue to use credit and pay on time every time. Demonstrate that you are managing your fiances well and your scores will begin to climb. If you have suffered a bankruptcy the effects can be long-lasting. According to myFico.com, a Chapter 13 bankruptcy can linger for seven to more than 10 years on your report. A Chapter 7 bankruptcy, or total liquidation, can affect your record for 10 years. It is vital to constantly monitor your credit report and review it for accuracy. You can obtain your report for free once every twelve months from annualcreditreport.com.
Credit cards can be a great source of safety and convenience but they can also be trouble. Buy now and pay later can have serious consequences and lead to financial trouble. So in order to stay financially fit it is important to use your credit cards wisely. Here are a few tips to help you make the most of your credit cards: • This seems simple but pay off your balance every month in full. Interest charges on your credit card purchases can add up fast. • If you do carry a balance, pay back as much as you can as quickly as possible. You don't have to wait until the payment due date. • Avoid using your credit card to withdraw cash or transfer money. Interest is charged on these transactions immediately. • If you are considering a card with an annual fee, be sure that whatever reward or benefit you're getting is worth the cost. Bottom line stay within your budget. Only use credit cards for things you can afford. If you can't afford it don't buy it. You will be much happier without the new sweater when you have enough money to buy a new home.
Did you know your credit score is always changing? Your credit score could be one number on one day and a different figure the next and even vary from one credit reporting agency to the next. Your credit score also known as your FICO score is based on the information contained in your credit record. Since your credit file is always changing so is your score. Your credit record changes every time a company you have credit with reports an on-time payment — or more important, a missed payment that's now more than 30 days late. Your score changes each time your credit card balance changes or you apply for new credit. There are three main credit reporting agencies; Experian, TransUnion and Equifax. Another factor that could affect your score is that not all lenders report to all agencies. To know your credit score you can pull a free credit report from all three agencies once a year. Look for missing or incorrect information. It is important to get that resolved as soon a possible. Click here for more information on obtaining a free credit report.