Your credit report is produced by each of the three U.S. credit reporting companies, which compile information about your debts, loans and payment history. What’s included? Information about your current and previous credit cards, mortgages, loans (auto, student, personal) and other debt, including late and missed payments. If you haven’t seen a recent copy of your credit report, order it. Why? Because the information it contains is used to determine your credit score – and if you spot any discrepancies, you’re entitled to dispute them. Per Federal law, you can request a copy of your credit report from each of the three companies once each year for free – and an easy way to do this is through www.annualcreditreport.com. Just be aware, however, that your credit report does not contain your credit score – and the law does not require the credit reporting companies to provide credit scores at no cost.
A decade ago, zero down loans were fairly common, and as we now know, may not have been the best choice for many borrowers. Today, a 20% down payment is typical, but even that is not a hard and fast rule. Lenders are often willing to work with borrowers who have a lower credit score, but can afford a higher down payment. The same can hold true for borrowers with the opposite qualifications – a great credit score, but less money available for a down payment. It’s the combination of factors that counts.
Debt matters to lenders. As a general rule of thumb, your debt load, which includes home payments, taxes, insurance and debt from credits cards and loans, should not exceed 36% of your gross monthly income. Of course, the lower your percentage, the better, and many successful mortgage buyers have debt-to-income ratios that average about ten percentage points lower. So if you have high credit card, loan or other debt, it’s a good idea to pay it down as much as you can before you apply for a mortgage.
Every time you apply for credit, including loans or new credit cards, you lower your credit score. Each new application is reported to the credit bureaus, and when lenders see a large number of credit inquiries, especially right before you apply for a mortgage, they think you’re overspending – and that can affect both your odds for approval and your rate. There is one exception, however. If you have no credit at all, apply for a credit card as far in advance as possible – six months or more should do the trick. You’ll establish a credit history, and though the application will lower your credit score a bit, time will have passed by the time you apply for a mortgage. But make sure you apply for a card that you’re likely to be approved for – otherwise, you’ll be shooting yourself in the foot.
All of these actions take probably more time than you think – after all, you can’t have credit report errors corrected or save up for a down payment overnight. So if you’re thinking about buying a home in the near future, start taking these steps as far in advance as possible – six months or more, if you can.
So whether you’ve already found the perfect house or plan to start house hunting over the next few months, now is the time to start taking steps to make yourself as mortgage-worthy as possible – after all your dream home – and glass of bubbly – await. For more information, visit FirstService Residential, North America’s property management leader.