10 Things Every Home Buyer Should Know About Credit Scores

January 15, 2019 | By Mary Hayes

 

10 Things Every Home Buyer Should Know About Credit Scores



 

If you are using a mortgage loan to help cover the cost of a home purchase (as most buyers do), you need to understand how credit scores work. Your lender will review your credit when you apply for a loan. This three-digit number can help or hurt your chances of getting approved, and it also affects the interest rate you receive. So it's doubly important.

 

Here are ten things every first-time buyer should know about credit scores, mortgage loans, and the relationship between them.

 

1. Your credit score does not come out of thin air. It is based on your financial behavior. Good financial behavior will help you earn a good score. Bad behavior on the other hand ... well, you get the idea. So don't blame the credit-reporting bureaus for your score. It comes from your own actions.

 

2. In point #1 above, "good financial behavior" can be defined as paying your bills on time, managing your debt, and using credit sparingly. These three things will help you attain a higher score.

 

3. There are several types of credit scores. Your FICO score is the one used by most lenders, so it's the one you should care about the most as a borrower. This score ranges from 300 to 850. Just like in high school, a higher score is better.

4. Mortgage lenders will look at several aspects of your financial situation when considering you for a loan. Your credit score is one of the top-three factors that determine approval (or rejection). Your current debt and income levels also rank high on the list.

 

5. A higher score will help you (A) get approved for a mortgage loan and (B) secure a good / low interest rate on that loan. A low score will make it harder to do these things.

 

6. You actually have three different scores -- one produced by each of the three credit-reporting agencies: TransUnion, Equifax and Experian. They do not always match. So be sure to review all three of them before attempting to buy a home.

7. You can obtain your credit reports for free through AnnualCreditReport.com. But you will probably have to pay a small fee (generally around $20) to obtain your scores. You might see "free" scores offered on websites, but it will require you to sign up for some kind of monthly monitoring service. Save your money and just get the scores by themselves. That's all you really need at this stage.

8. You can get all three of your credit reports (different from your scores) for free, once per year. The government actually mandates this by law. But the only website that is monitored and regulated by the FTC is AnnualCreditReport.com. So that's the one you should use.

9. If your score is low, you can improve it by reducing your credit card balance, by paying all of your bills on time, and by fixing any errors on your credit reports. Paying your bills on time is most important, because it "weighs" the most in the scoring models.

10. There's a lot of misinformation and confusion surrounding this topic. But it's not as complicated as some people make it out to be. Good financial activity leads to a good score. And the reverse is true for bad financial activity. You are in complete control of your credit score -- nobody can improve it but you.

For assistance in learning about your credit score to purchase a property, please call or text American Homes Group 718.981.3400 / email [email protected]