Whether you’re in the market to purchase a home within the next six months or you think you might want to buy a place in a few years, it’s time to look at your credit report.
Why? Because regardless of when you plan to buy a home, your credit report is going to play a major role and it’s crucial for you to know what it says and if it’s accurate.
“Your credit report is essentially your financial portrait,” said Franco D’Angelo, a mortgage advisor with BMC Keystone Home Mortgage. “In other words, it will contain information about your credit cards, car loan, student loans and mortgage.”
Your credit report shows if you’ve been making payments on time, if you’re behind on your payments, exactly how far behind you are and if you have any collection accounts. All of that information gets reported to the three main federal credit bureaus and then shows up on your credit report.
The difference between your credit report and your credit score
Basically, your credit score is a three-digit number that ranges from 300-850, which is calculated based upon the information on your credit report – and it is just one factor used by lenders to determine your creditworthiness for a mortgage and other consumer credit. Your score is a key factor in determining whether you’re approved for a loan as well as what interest rate you will be offered. The higher your credit score, the better.
Your credit report is a detailed report of your credit history. It lists your creditors, account numbers, date the account was opened, initial and current balance and whether it’s paid-off, current or past due. The credit bureau applies a mathematical formula to this information to determine your credit score.
While your credit score is just a number, you can refer to the information on your credit report that’s used to determine the score, good or bad.
So what does all of this have to do with buying a house?
“If you’re thinking about buying a home or financing a big purchase, your credit is going to be reviewed,” D’Angelo said.
If you’re considering getting a federal loan, such as FHA, you will need a credit score that is 640 or greater. If you’re looking to obtain a conventional loan to purchase a home, you’ll need a credit score of 740 or greater to qualify for the best interest rate and terms.
“I recommend pulling your credit report six months prior to your purchase to see where you stand and if you need to address anything, such as collections accounts, high balances, late payments or mistakes.”
“If everything looks good on your report, you now know you’re ok and prepared to move forward,” he said.
Why should you look at your report six months ahead of time?
“If your credit score is a little weak, you’ll need time to take the necessary steps towards improving it. Again, the higher your credit score, the better the interest rate that you’ll be offered,” he explained.
If you’re thinking about buying a home and getting a mortgage, D’Angelo recommends contacting a trusted mortgage advisor six months ahead of time to begin the pre-approval process.
“The first step of the pre-approval process consists of reviewing your credit report and monthly income to make sure you’re qualified and in good financial standing in order to get a mortgage,” D’Angelo said.
If you’re not currently looking to buy a home, D’Angelo recommends checking your credit report once a year. Doing this allows you to make sure you catch any problems early and resolve them so they don’t persist and negatively affect your credit for a long period of time.
To review their credit report, consumers can contact the three major credit reporting companies (Equifax, Transunion or Experian) and request a copy. By law, consumers can get a free copy of their credit report every 12 months if they ask for it.
Get your free credit report here or call 1-877-322-8828.