Credit Score More Important than Salary or Assets When Buying a Home

If you’re considering buying a home, there’s one number more important than all the others – your credit score.  It tells lenders how likely you are to pay back your loan in a timely manner.  The more risk a potential buyer poses, the harder it is to get a loan with the lowest possible interest rate and the best terms.  Yet surveys show that 97% of consumers neglect to find out what their credit scores are and to understand what they mean.

For example, if your credit cards have been open several years with an excellent record of on-time payments, lenders are assured that you will not fall behind on mortgage payments.  Because many homebuyers do not understand this, they often rush to close longtime accounts in good standing before applying for a mortgage, which can weaken their credit scores.  As one loan officer states, “If you’re going to close credit cards, do it in a mindful way.  Do not close the old ones with high limits and low balances.  Close the young ones with low limits.”  Also, if you are nearly maxed out on your credit cards, this can weaken your score.

The nation’s most widely used credit scoring formula, called FICO, assigns scores that generally range from 300 to 850, with the median being 723.  To get an accurate picture of a buyer’s credit score, lenders pull FICO scores from all three reporting agencies, then most base their decision on the middle one of the three scores.  If a couple is applying jointly, then six credit reports and six credit scores are pulled.

For the FICO score, the most critical period is the most recent one to two years.  Many consumers do not pull their credit report, although credit observers encourage everyone to pull their reports at least once a year.  Federal law allows consumers to access their reports with each one of the major credit bureaus free once a year at http://www.annualcreditreport.com.

When you get the report, review it closely and check for errors and possible fraud, such as identity theft.  By law if you find what you think is an error, the credit bureau must investigate the matter.

Below are some myths and facts about your FICO score:

Myth:  Once you have credit problems, your credit score will not improve for 7 years

Fact:  You can improve your credit score over a shorter time.  The most recent entries carry more weight than old ones.

Myth:  If you catch up on your late payments, it won’t show up on your credit report

Fact:  Your credit report will show that you were late

Myth:  If you have a good FICO score one late payment won’t hurt it

Fact:  A first-time delinquency can drag down your score by at least 100 points.  The later the payment, the more the damage.

From the January 28 Las Vegas Review-Journal