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Published on March 4, 2019 | Webster Bank
By Mina Minelli, Senior Vice President & Shoreline/Central Regional Manager, Home Loans, Webster Bank
When youÕre ready to finance a new home, you may get thrown a curve ballÑyour credit score. A recent study by the National Foundation for Credit Counseling found that 36% of people think there’s no reason to check their credit score, much less what kind of credit score you need to buy a house. The better your credit history, of course, the better your chances of getting a mortgage with a favorable rate. But thereÕs more to know about credit scoring and home mortgages. To avoid striking out, it helps to know some key rules of the game.
A credit score is a number summarizing your credit risk, based on your credit history. It helps lenders evaluate your credit profile, which in turn guides the credit they make available to you, including loan and credit card approvals, interest rates, credit limits and more.
Your credit reports shape your credit history. Three major credit bureaus house your credit data: Equifax, TransUnion and Experian. Whenever you get a new loan or credit card, or make or miss payments, that creditor reports the information to the credit bureaus. ItÕs captured in your credit reports.
ItÕs common for your credit reports to be slightly different at each credit bureau, since creditors can report to any, all three, or none.
Think of the score you get online as over-the-counter. The score that lenders use is prescription-strength
Some people pull their credit score from a website and go to the bank, believing their 800 score is a homerun. They are later stunned to discover that the lender may pull a score that is significantly lower.
Mortgage lenders use an approved industry model specific to mortgage financing. ItÕs based on algorithms that drill down to get a comprehensive credit risk assessment on a consumer. This modelÕs algorithm takes into account your scores from all three credit bureaus. Lenders then base their calculations on the middle of the three scores. This approach gives them a much tighter fix on your ability to repay a loan.
Remember that lenders will pull that mortgage-specific score on the day you apply for the loanÑone more reason to keep your score in the best possible shape.
According to CNBC, more than one in five consumers have Òa potentially material errorÓ in their credit fileÑa mistake that makes them seem like a bigger risk than they actually are.
YouÕre entitled to a free credit report every twelve months from each of the three major credit bureaus. That right is guaranteed by Federal law and checking your report doesnÕt hurt your score. In fact, it may help you identify an error. While many websites offer those reports, the official site is www.annualcreditreport.com.
Note that youÕll get your credit reports, but not your credit score.
You can request all three reports at once or you can order one report at a time. By requesting them separately (for example, one every four months) you can monitor your credit reports throughout the year. Remember, your credit report is a snapshot in time, so reviewing it throughout the year allows you to get a clearer picture of your overall credit position.
Go over each report and challenge any errors with the credit bureau providing it. Filing a dispute isnÕt difficult and it doesnÕt cost you anything. Each credit bureau has its own easy steps to follow. Find them here:
Perhaps youÕre now using a newer card offering valuable rewards, from hotel discounts to airline points. But those older cards in your wallet have a deeper credit historyÑand your credit history is the most important way for a lender to assess your risk.
Keep your older cards open. If you close them, youÕll wipe away all the credit history they carryÑand you could be shortchanging yourself on a mortgage rate.
Maybe you cosigned a car loan for the teenager in your family. Never mind the fact that he or she is paying the monthly billsÑif thereÕs ever a late payment, it will hurt your score. Cosigning means you are equally responsible for the payments.
DonÕt overlook any cosigned loans when you approach mortgage lenders, because these factor in.
Some people get so excited about their upcoming move, they open credit cards at several furniture and appliance stores. Remember, the more debt you add, the less house youÕll be able to afford. If youÕre suddenly paying another $600 a month on credit cards, thatÕs $600 a month you potentially wonÕt have for a mortgage. Only assume more credit when you truly need it.
On that same point, defer opening new loans or credit accounts. The debt you add will ding your score. Lenders may be concerned that youÕre taking on too much.
We recommend keeping them below 30 percent of the credit limit on each account. The ratio between the amount of credit you have and the amount you owe is a key factor in your creditworthiness. If you maintain enough available credit, youÕre less likely to need more funds. Lenders will note thatÑand see you as less of a risk.
You wouldnÕt expect your favorite team to jump into the season without spring training. Take the opportunity to get financially fit first. Before going to a lender, review your credit, assess your finances, and put a budget in place.
To buy a house, you need a credit score in the best possible shape. Paying close attention to your credit can improve your chance at qualifying for a more flexible loan with a better rate. Make every season of your credit life a winning season!