Credit Reports – How Important Are They When Buying a Home?

Villa Properties Credit Reports and Home BuyingWhen the time comes to buy a home, most people do not have the money to buy their house in cash. This means that, sooner or later, if you want to buy a home, you’ll need to speak with a lender who will refer to your credit report. Your credit report will help them decide whether or not to lend you the money.

Why is that? Credit reports are used by lenders to evaluate the risk of lending you money to buy a home. Lenders reviews items such as: ability to make payments on time, your level of debt relative to your income level, types of credit you’ve been able to secure, and how long you have had credit.

Looking for Red Flags

What lenders are really looking for are red flags in your credit history that might indicate that you’ll have trouble repaying the loan. Some of the things that send up red flags for lenders include:

  • Consistent or frequent late payments – If your credit report shows a history of late payments, it tells lenders that you’re more likely to be late with their payments. And especially if the late payments are recent, it’s even more of a red flag.
  • High Debt – Lenders look at your total debt relative to your total income. If your total debt (car payments, credit card payments, student loan payments, alimony, etc.) divided by your total income is high, that raises a red flag. A high debt-to-income ratio indicates restricted free cash flow.
  • Liens or foreclosures – If you have any liens, re-possessions, or foreclosures on your credit report, that’s a red flag. What’s more, such records typically stay on credit reports for years.

Cleaning up your Credit Report

Just as a bad credit report will work against you, clean credit reports will work for you when the time comes to get a home loan. To that end,  it’s important to make sure that your credit reports are as accurate and clean as possible. To clean up your credit report, you should:

  • Pay on time. Shoot for 12 months of on-time payments, before you go for a home loan.
  • Understand the different kinds of credit. Home loans, car loans and credit cards are all different kinds of credit, with their own unique rules. Before engaging in any credit, make sure you fully understand those rules.
  • Don’t borrow too much. Maybe the most fundamental strategy, but it’s also the most effective. Understand how much credit you can afford to pay, and don’t exceed that limit. Ever.
  • Spend responsibly. Just like you should understand your credit limits, you also need to set a budget, and stick to it.
  • Monitor your credit reports. Bad information on your credit report can delay your credit decision. Make sure you review your credit reports on a regular basis, and check for anything that’s incorrect or might negatively affect your credit. If you find something, dispute it to have it removed.
  • Pay off balances. Nothing makes a credit report shine like a history of paying off what you owe. So pay off those outstanding balances, and make your credit report tell a story that makes you look good.

Laurie Christeson, a mortgage advisor at OPES Advisors, tells all of her borrowers “..to not keep a running balance of over 25% of available credit for any one credit card.  Make revolving credit payments every two weeks vs. once a month and always pay a little extra towards balances each month, even $5/extra can boost scores.  Shopping around for credit cards etc., when you begin to look at purchasing a home can reduce your scores negatively.  Once borrowers sit down with a lender, they should be instructed to not open any new credit as this can sometimes push debt ratios over what lenders allow, therefore they may no longer qualify for a specific loan amount.”

Laurie also recommends, “ordering a free credit report by logging onto the government’s website: annualcreditreport.com. This is a free report complied by Transunion, Experian and Equifax; the 3 credit reporting that lenders use when pulling credit reports.  This report is available free once a year.”

There’s really no magic fix to produce good credit reports, but following the steps above really does help. Credit reports are very important to the home-buying process, and they can be turned into documents that sing your praises, instead of telling tales of woe. So make sure that you take the time to get your credit reports clean and optimized – if you do, it can make all the difference in getting the right loan for the right home.

Ready to purchase a home? We can help. Give us a call at (925) 519-0794 or send over an email and we would be happy to answer any additional questions you may have.

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