When you apply for a mortgage or any other type of loan, your lender will ask your permission to obtain a copy of your credit report.
What is a credit report? It is a collection of information about your credit history, compiled from many sources and put into one report by consumer credit reporting companies (also known as credit bureaus.) Whenever you open a credit card or take out a loan to buy a car, pay tuition or buy a house, for example, these lenders will report your payment history to the various credit reporting companies. Each reporting company combines the information from your various lenders into one file, called a credit report.
They are actually called “consumer credit reporting companies”. You can then say (also known as credit bureaus)
Your lender will then examine your credit report and other factors to decide if you will qualify for a loan.
Credit reports are compiled by credit bureaus, including Experian, TransUnion and Equifax. All credit reports contain basically the same categories of information:
- Identification. This includes your social security number, date of birth and places of employment.
- Trade Lines. This includes payment history on all of your home loans, car loans, student loans and credit cards. Your lender provides periodic updates on your loans to the credit bureaus.
- Inquiries. Lenders place an inquiry each time you apply for a loan or a credit card and before they offer you a pre-approved line of credit. This section is basically a list of everyone who accessed your credit report within the last two years.
- Public record. This includes information from state and county courts as well as collection agencies regarding any law suits, bankruptcies, foreclosures, or judgments against you.
If you rent, your credit report may also list your rental payments.
How to Check Credit Score
It’s very important to check your credit as the first step in the mortgage process. That’s because your credit history can affect what types of loan programs your lender will offer you. The type of loan will also affect the interest rate you’ll get.
You can get one free credit report each year at https://www.annualcreditreport.com. If your free credit report does not contain your credit score (also called a FICO score), you can purchase your FICO score directly from the three major credit bureaus:
What is a Good Credit Score?
Credit scores typically range from 300 to 850. The credit bureaus (Equifax, TransUnion and Experian) assign a numerical value to different items in your credit history, then apply a formula to calculate your score. Because each of the three major credit bureaus uses a different formula to calculate credit scores, the score reported by one bureau may vary slightly from the scores reported by the others.
What is a good credit score? In general, credit scores close to 700 and above 700 are considered good. Scores close to 800 and above 800 are considered excellent. According to the Consumer Financial Protection Bureau, you will likely pay more for a mortgage if your credit score is below 700.
Buying a Home with Bad Credit
Buying a home with bad credit is more difficult, but it is not necessarily impossible. Many homebuyers with credit scores below 700 are able to qualify for loans that are backed by the FHA or VA. Freedom Mortgage is an FHA-approved lender and has been a VA-approved lender for more than 25 years.
Keep in mind that lenders look at many other factors besides credit scores when qualifying you for a loan. For example, if you have a high debt-to-income ratio or other factors, you may not qualify for a loan even if you have good credit.
How to Increase Your Credit Score
As a lender, Freedom Mortgage cannot provide credit counseling to individuals – however, we can point you toward useful information that has been compiled by annualcreditreport.com and the Federal Trade Commission (FTC).
The first step in improving your credit is to obtain your credit report. As previously mentioned, you can get one free credit report each year at annualcreditreport.com.
- Read through it carefully
- Make sure there are no mistakes, as that could affect your score
When reviewing your credit report, check that it contains only items about you. There may be loans or other data pertaining to another person with your name. For example, if you see an address listed as a former place of residence, but you never lived there, that is an error.
Also, look for any other errors or information that should no longer be on your credit report such as bankruptcy from many years ago.
If you find errors, you should contact the credit bureau to dispute the inaccurate or incomplete information.
If your free credit report does not contain your credit score, you can purchase your FICO scores directly from the three major credit bureaus:
If one score is very different from the others, you have the right to contact the credit bureau and dispute anything that may be in error. That is an important step in increasing your credit score.
If you would like more information on how to increase your credit score, visit www.consumer.ftc.gov. Here is a summary of the information on that site:
- Pay your bills on time. Late payments and bankruptcies can lower your score.
- Stay under your credit limit. As the amount you owe on a credit card gets closer to your credit limit, you score may suffer.
- Don’t apply for too many credit cards at once. It’s fine to establish different types of credit accounts over time, however, if you open lots of lines of credit especially when you are buying a house, it may negatively impact your score.
The team at Freedom Mortgage is here to serve your home financing needs throughout the mortgage process. Find out more about the services we offer. Visit www.freedommortgage.com or call Freedom Mortgage.