Whether this is your first or your fifth, buying a home is a big deal and can come with a whirlwind of emotion. The excitement of something new, the adventure and maybe the challenges of a move can be overwhelming. If you can get your head to do some planning, your heart will follow easier and hopefully feel more enjoyment than stress. Credit may be one of the most sticky parts of preparation.
Review: Pull your credit on one of the free sites, like Credit Karma or go directly to each of the bureaus – Experian, Equifax, or Transunion – and look at your credit history. Does it look correct? Is your payment history clean for the last 24 months? How is the score? Most of the sites will have a credit model so you can see where yours is in relation to basic standards.
History: Most lenders look for three tradelines with 24 months of history. If you don’t have those – consider opening a card next time you shop and pay it off right away. Do this a couple of times a year to build a relationship. You’re more likely to have a score once you have used and paid off credit.
Balances: What your balances are in relation to the credit available matters. Keeping the outstanding debt under 30% of the available limit on all cards will go a long way to making your score go up.
Inquiries: There are soft pulls like when you get hired and they pull a report that won’t ding your credit and hard pulls like when you are car shopping that might tip the score by a couple of points. If you are shopping for a car – they typically will only count it as a tick to the score once every month (not totally sure on the timeframe) as they give you time to shop for a car/loan. Same goes for mortgage. If pulled in a certain timeframe it won’t impact your score any more than once.
Legal items: These are typically things like a judgement or a bankruptcy and can take anywhere from 7 to 10 years to drop off of your credit. They will also effect the type of loan you are able to obtain. Most lenders want two to four years post bankruptcy before you can do a mortgage loan. There are exceptions to this. If you have had a recent bankruptcy, it would be good to talk with a mortgage professional about what your options are as you plan. Same with judgements. Discuss with your loan professional how these should be handled and how they will effect your home buying plan.
Collections: These are a challenge. Sometimes you won’t know you have one. It could be a trip to the ER while on vacation where the bill never caught up to you. If you find you have one, even if it’s a nominal amount like $100 – don’t pay it right away. You are better to leave in on there – confirm that it belongs to you, even make a deal with them to reduce it if you pay it in full BUT don’t pay it. Why not? Well, collections are scored by date of last activity. What this means is that when you pay it off, it changes the date of last activity on it to the day that you pay it off. For instance if it’s from three years ago, it isn’t really bugging your score too much since it’s more than 24 months old. As soon as you pay it – the algorithm registers collection activity and will knock your score by a significant amount. Best solution? Write a letter explaining what happened for your lender and agree to pay it at closing. This allows you to not disturb your score and to still get rid of it at the proper time.
Credit can be tricky. If you have questions, please reach out to me. I’m happy to assist you in the journey toward a new home loan.
Have helped buyers of all types and financial levels and worked on 1000's of loans.
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