Timing is everything when purchasing a home!
I would like to preface this blog with saying that I am not a financial expert, lawyer or mortgage broker, I am a Realtor®! I would recommend that you talk to one of them before you make any changes to your profile or credit history. This is just to help you understand what is on your report so you will have some knowledge before contacting one of them! With that being said lets cut to the chase:
You need to have all of your proverbial ducks in a row before you even consider purchasing a home! The first place to start is looking at your credit report. You are allowed a free report once a year from all three credit bureaus: Experian, Equifax and TransUnion. You should review them for accuracy and look for things like the following:
- Original Dates: The length of your credit history plays a big part in your credit
score:15%. If a company changed hands then they might not have the original date you got your credit, it may have been changed to the new company taking over date.
- Late Payments: There should be no late payments listed over 7 years old on the report as approximately 35% of the credit score is based on these.
- Payment Records: All paid in full or collection settlements should show a zero balance.
- Collections: There should not be any collections listed after 7 years on your record.
- Available Credit: Credit limits should match your monthly statements you receive from your card holders. It is best to keep the balances under 50% of the available amount as debt accounts for 30% of your credit score.
- Mysterious accounts: Make sure you recognize all the accounts listed on the report. You should contact the creditor immediately if you find an error as this could be a mistake or a case of identity theft. If it is identity theft then you should request a fraud affidavit from the creditor and file a police report.
- Types of Accounts: Make sure the accounts are listed correctly by category… example would be a home equity line of credit should be listed under a second mortgage, not a line of credit.
- Reason Codes: Make sure of the reason the credit bureau gives for the score they did based on their reason codes listed in the credit report .
The key for good credit is reviewing your report annually and finding and
eliminating those errors. Also many people tell you to close those paid off credit card accounts but that could shrink the available amount of credit listed on your report which in turn can hurt your credit utilization ratio! I would recommend you talk to your bank or a good mortgage broker who can guide you in the right way to go in these areas.
If you find your credit score is a respectable 680 or higher you are doing fine and should move ahead with your plan to purchase a home.
One more word of advice, when you are in the middle of purchasing a home don’t go buy a car as it will show up on your credit report and kill your home purchase (I had a client that did this and it put his purchase off over a year)… buy the car after the home closes!