Credit
Information
What is credit?
What is a credit score?
What role does credit play?
What do I do when I get my report?
How do I establish credit?
How do I re-establish good credit?
How do I correct a mistake?
For many homebuyers, credit is a big consideration in the buying process. In applying for a mortgage, your credit may be the single factor that opens or closes the door to purchasing the home you want at a low interest rate. You may believe you have a strong credit rating but have never actually seen your credit report. Or perhaps you‘re concerned that past credit problems will come back to haunt you as you apply for a mortgage
Whichever boat you‘re in, the first step is the same: Obtain a copy of your credit report for a small fee and review it for accuracy. Credit reports are maintained by three credit reporting agencies: Experian, TransUnion and Equifax. It‘s a good idea to obtain your credit report from all three agencies, since each may contain different information and you don‘t know which agency will be supplying your report to your lender.
If
there is incorrect or missing information that would improve your credit
score, report it to the credit bureau. Under the Fair Credit Reporting
Act, consumers have the right to review and contest information in their
credit reports. Even if your credit report reads exactly like you expected
and your credit is in fine shape, going into the mortgage application
procedure with peace of mind is worth the nominal fee.
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What is credit?
Credit
is a record of a person‘s debts and payment history. Credit bureaus compile
individual reports of consumer debt through an array of sources, including
credit card companies, banks, the IRS, department stores and gasoline
companies, and any other entities granting loans. A credit report is a
résumé of your financial performance, with information on your payment
standing for all the accounts you‘ve held for the past seven to 10 years
(seven years for accounts not paid as agreed and 10 years for accounts
paid as agreed).
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What is a credit score?
Credit scores, also called "beacon scores," are composites that indicate how likely you are to pay on a loan or credit card as agreed based upon your payment history, amount of debts, length of credit history and types of credit in use. The credit grantor reviewing your loan application compiles your score based on information from your credit report and other data, including your income level.
Fair, Isaac and Company (FICO) developed the mathematical formula for establishing scores. Scores range from 300 (poor) to 850 (excellent), and the rule of thumb is the higher the score, the lower the risk to lenders.
In
the past, consumers have not been allowed to view their credit score or
be informed of the factors that determined their scores. However, C.A.R.-sponsored
SB 1607, signed by California Gov. Gray Davis on Oct. 2, 2000, granted
California homebuyers access to their credit scores and pertinent information
about what factors determined their scores. The legislation, which becomes
effective July 1, 2001, also allows consumers to receive their credit
scores when they request copies of their credit files for a nominal fee.
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What role does credit play?
Lenders
review credit reports to determine debts owed and if they are repaid according
to the terms of the initial contract. If you have any outstanding debt,
lenders will analyze your debt-to-income ratio and how that debt will
factor into your ability to make your mortgage payments.
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What do I do when I get my report?
Read
through it carefully, paying extra attention to the section on your account
payment history.
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How do I establish credit?
If
you have never taken out a credit card or borrowed money from a financial
institution, or if your accounts are young, you can establish credit history
by having your rent payments to landlords and monthly payments to utility
companies added to your credit report.
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How
do I re-establish good credit?
If
your credit report contains negative information, such as frequent late
payments, repossessions, collection activity or bankruptcy, you may want
to wait to apply until after you‘ve improved your credit record. Rebuild
your credit by showing strong payment history in the years following any
problems. Most lenders prefer for three years to have passed since a foreclosure
on a mortgage and at least two years since bankruptcy. Lenders are willing
to forgive past black marks on a credit report if you establish a pattern
of responsible debt repayment.
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How do I correct a mistake?
Follow
the directions of the credit bureau issuing your report. The bureau will
contact the source of the information in question and attempt to resolve
the dispute. Also, if late payment information is accurate but you have
a good explanation (e.g., you were laid off from work or became very ill),
you are allowed to add that information to your report.
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Exerpt
from the California Association of Realtors (CAR) website
The
American Dream
Home
Buying in Alameda
Using
A REALTOR® When Buying A Home
Beginning
Your Home Search
Search
for Homes and Properties
Home
Financing
Closing
Costs Customarily Paid By Buyer
The
Transaction From Start To Finish |
