Shopping for a mortgage or not, you need to protect your credit score
DIY Credit Repair Tips
by J.D. Roberts
Credit Report Errors
Always a Buyers' Market
If you are contemplating even the slightest possibility that you plan to seek a home mortgage loan in the near future, you need to start working to repair any credit issues you have right now, no matter how far into the future your home purchase will actually be.
Importance of On-Going Credit Maintenance
With any type of financing, particularly with an investment as large as a home mortgage, there needs to be significant attention paid to the state of your credit rating. But credit scores mean a lot more in today's world than just your ability to get approved for a loan.
Credit scores now dictate many things like the rate of your insurance premium, your ability to get a job, and how much cash you need to pay in down payments and deposits for a variety of services.
When it comes to a home loan, the stakes are even higher. For this reason, all consumers should be regularly monitoring their credit histories and acting in the best interest of a solid credit score.
What a Difference a 730 Makes
Since the mortgage crisis of the last few years, mortgage lenders are taking a much closer look at applicant qualifications before approving a home loan. Some of the tighter requirements include stable job history, adequate income, the ability to pay 20% of the home purchase price as a down payment, and the ability to afford associated closing costs.
As for credit scores, lenders are looking for borrowers with a credit score of 730 or higher in order to pass along the best deals available in mortgage loans. With a high credit score, borrowers can save hundreds of thousands of dollars over the life of the loan. This is due to the much lower interest rate the borrower can get with a solid credit history. The interest rates may appear to be a small number, but the difference between 4% and 7% APRs can mean huge savings.
Here is just one example of the difference a good credit score can make for obtaining a lower APR on a mortgage loan:
Home Price: $350,000
4% APR for 30 year term = Estimated monthly payment $1,670.95
Estimated total interest paid = $251,543.27
7% APR for 30 year term = Estimated monthly payment $2,328.56
Estimated total interest paid = $488,281.14
Those with a credit score of 730 or higher prove to be much less of a risk to lenders. As a result, those with scores less than 700 may send a red flag that the possibility of default exists based on past credit performance. You can clearly see that the lower APR in the above scenario has the potential to save you more than $200,000 over the life of a loan.
How to Start DIY Credit Repair for a Better Mortgage
There is no way to stress the importance of starting early with credit repair. Once you begin taking the steps to better credit, it is vital to continue monitoring and improving your credit situation in order to save money for your overall financial life.
Here are the first-step basics for preparing your credit for a mortgage loan:
- Order All Reports and Scores - All consumers have the legal right to request free annual copies of their credit reports from the consumer credit reporting agencies. Along with the credit reports, it is essential to add on and pay the fees to access three-digit credit scores for the corresponding credit report. Consumers are encouraged to take advantage of the free credit report once a year and at any time they are refused credit. It is the only way to stay in touch with your credit activities and likely the best way to identify issues of identify theft.
- Review and Dispute - It is estimated that 80% of consumers have errors on their credit report. Simply put, credit scores are calculated by data reported and entered by humans. For this reason, it is possible that inaccurate information on your credit report is working against you. Each credit reporting agency has protocol for disputing and correcting these mistakes. Review every line and every detail of the information on your credit report at least once a year.
- Get on Schedule - If you are not working with a monthly budget, it is likely your bill payments are not always made on time. This has a huge impact on your credit score. Make a point to pay bills before the due date. Within a few months, credit scores can get a boost from your payment consistency.
- Stop Spending - If you are over-utilizing your credit, it is time to reign in your spending. Lenders will look at the amount of money you are spending on credit versus how much is allocated to you. If you have exceeded balances over 30-40% of your total credit allowance, you may be considered a risk. Pay off as much debt as you can before applying for a home loan.
- Shop Around...But Cautiously - It is financially-wise to shop around for the best mortgage packages before committing to one lender. While credit scoring bureaus do take into consideration multiple loan applications when applicants are doing their research, it is vital you do not submit credit applications to every corporation providing loans. Doing this can be detrimental to your credit score and you may end up being denied the loan due to your credit application activity.
Mortgages for a home purchases will likely be the biggest financial investment you make in the course of your lifetime. It is necessary to pre-plan your finances in advance and even more important to work on achieving the best credit score you are capable of before seeking any kind of financing, especially a home mortgage loan. Requirements by lenders will only get tighter and a good credit score is an earmark of solid financial sense. It is in your best interest to be as familiar with your credit score and history information if you hope to gain a solid footing on your financial future.
Take the Next Step:
- Do you know your credit score? Get yours now at myFICO.
- For more on credit scores and credit reports, please visit The Dollar Stretcher Library .
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