Credit
When you talk to a loan office about a mortgage, or any loan, one of the first things they will do is pull your credit report. The credit report that is used by banks is called the tri-merge report. This report is a combined version of your credit report from the three major credit bureaus (Transunion, Equifax, & Experian). This ensures that the bank will learn about your entire credit history. They do this because many companies report accounts to only one of the major credit bureaus, so all three of your credit reports may be different. Before you shop for a mortgage, you should get a copy of your credit report to make sure there are no errors on your credit report. If you do find errors, you can submit a dispute in writing to the credit bureau. The bureau then has 30 days to verify that the information is correct, or remove it from your report completely.
Errors
Many people find errors on their credit reports when they go to apply for a mortgage, credit card, or other type of loan. You should check your credit every year to make sure there are no errors on your credit report. A new federal law requires the three major credit bureaus to provide you one free credit report every year. Visit annualcreditreport.com to obtain your free report from each of the bureaus. The law does not require the bureaus to provide your credit score. To get your credit score you must pay for it. Visit myfico.com to get your credit score.
Credit Scoring
Credit scoring is one the most misunderstood parts of a credit report. Each of the three major credit bureaus assigns you a score. The score is based on the content of your credit report. The reason this scoring is not well understood is that the algorithms used to calculate these scores are proprietary information and are not made public. It is commonly believed that your length of credit history is a major part of your score. The longer you have had accounts open the better your score will be. Many people cancel credit cards when they pay them off. This is not always good for your credit score. Then number of times you have applied for credit in the recent past will also impact your score. If you are shopping for a mortgage, you should apply with a few lenders in a very short period of time, generally within one week. Otherwise every time a lender pulls your credit, it will lower your score 3-5 points. If the inquires are all from mortgage lenders within a very short period of time, and there are not excessive inquires, it should not lower your score. For this very reason, you should avoid online mortgage brokers. They may send your file out to hundreds of companies that will all pull your credit. This can destroy your credit score over night. You should be aware that when you, as a consumer, check your credit report, it will not lower or affect your score. You should also know that your lender will not accept a credit report, that you bring them. They must verify the information, and a credit report pulled by a lender contains much more information on your accounts than a consumer report you may obtain.
Mortgage Rates and Your Credit
Your credit and credit scores directly influence how low your interest rate will be. Interest rates are tied to the bond market and fluctuate on their own, but your credit score also plays a role. If you have a very low credit score, and derogatory credit, you may have to get a "non-conforming" or "sub prime loan". This is a loan that does not conform to Fannie Mae or Freddie Mac underwriting guidelines. Your interest rate will be higher than if your credit is considered "A paper". "A credit" is generally considered a score of 720-850. Most mortgage brokers will start charging some sort of premium if your score is below 720, however, most banks have set rates that are not negotiable, and cannot be marked up based on credit score. Many banks will loan you money if your credit score is as low as 580. Your choice of loan programs may be limited, but your interest rate will usually be better if you can get a loan from a bank. If your credit score is below this threshold, a mortgage broker will usually be able to get you a loan, even though a bank will not give you one. You should be prepared to pay a premium in the interest rate as well as closing costs.
Credit Repair
Some people that would like to buy a home are simply not able to because of their credit history. There are ways to improve your credit score. Myfico.com has a product that will allow you to see how certain things will affect your credit. This is the best way to go about improving your score. Sometimes, just a few points is all that is needed, and paying down a balance, or paying off an outstanding account can make a difference. Beware of companies that offer credit repair services. There are very few credit repair companies that operate legally. Some of the companies do operate within the law, but they don't do anything an educated consumer could not do for themselves. If you are considering trying to repair your credit, please visit The Federal Trade Commission's web site on credit repair.