Hopeful to Homeowner Part 2: Building Your Case for Credit
Editor’s Note: In this three-part series on buying a first home, we’ll explore how to beef up on your financial literacy, review your credit report through the eyes of a lender, and negotiate the best deal on a home mortgage.
Establishing credit can be one of life’s Catch-22s: You’re turned down because you don’t have credit. But you don’t have credit because you’re being turned down.
Even so, if you want to own a home some day, it’s important you keep trying. If you’re like the 97 percent of young first-time homebuyers, you will need to take out a mortgage. That means lenders will scrutinize your credit report, which contains your employment history, credit history, and your credit score (sometimes called a FICO® score).
For a FICO score to be included on an individual’s credit report, the report must contain at least one account that has been open for six months or longer and at least one account with credit activity during the past six months. This ensures that there is enough recent credit history information to create the score, explains Christopher Brooks, vice president of Tampa Bay Community Development Corporation, part of NeighborWorks® America.
New homeowners Heang and Sallie Ly had an unusual situation: Heang had an established credit history but Sallie did not. Fortunately, the lender could use just Heang’s credit to qualify the couple for their new home in Arlington, VA. “But I’ve counseled my younger brothers to start opening [credit card] accounts now so that doesn’t happen to them,” says Heang.
Why Is Your Score Important?
Lenders will offer better loan terms to customers with higher FICO scores. “From a lender’s perspective, their goal is to limit risk while growing their customer base,” says Bruce McClary, a certified financial educator and government relations/public policy manager at ClearPoint Credit Counseling Solutions.
Having a FICO of 700 versus 698, a difference of two points, could cost you thousands in interest charges each year, he notes.
So, if you’re on the border of getting a better score, you may want to take steps to get there — which may be easier than you think. “Sometimes the fix can be quite simple,” says Kris Crecelius of All Real Estate Options in Orange Park, FL. For example, if a high balance on one credit card is keeping your credit score low, you should pay down that card and wait a month [for a rescore] to apply for a home loan.”
Crecelius recommends that people should keep credit balances less than one-third of their available credit amount, pay bills on time (every time), don’t open new credit lines, and correct any inaccuracies on their credit report with the credit bureaus.
Free Help is Available
Barry Ezerski, a managing broker with Re/Max-Lawton in Oklahoma, estimates that two-thirds of young servicemembers who make up the bulk of his agency’s clientele are not in a strong enough position, credit-wise, to buy their first home. Ezerski notes: “Young buyers often have champagne tastes and beer budgets. And if they’re turned down by a lender because they don’t have a long enough credit history or have a few missed payments, it can turn them off to homeownership altogether.”
To prevent that from happening, Ezerski puts buyers in touch with counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD) to get help in improving their credit report and learn about down payment assistance and the homebuying process.
A HUD-approved housing counseling agency will offer free or low-cost credit counseling services and can set up a debt management plan to help the borrower consolidate and pay off debt. Lenders with flexible approval guidelines may be willing to work with consumers who have been on a structured debt repayment program long enough to demonstrate progress, McClary says.
However, not all credit counselors are the same. Make sure the company you work with is HUD-approved and be wary of companies or individuals who promise to instantly “fix” your credit — for a price. “Credit can’t be fixed overnight and if a company is promising instant results, be very wary,” McClary advises.
How to Order Your Credit Report
By law, you can request a free copy of your credit report annually at AnnualCreditReport.com or by calling 877-322-8228. You can also request your report for free if you’ve been denied credit (within a certain time period). Just note: this is your credit report only and does not include your FICO score.
If you find an error on your credit report, you can file a dispute by going to the website of any credit bureau.
Worth the Effort
When it comes to building credit to qualify for a home loan, it can be tough to get started. But don’t give up, says Scott Bird, a real estate broker with Stratum Real Estate Group in Cedar City, UT. Borrowers with well-established credit put themselves in a better position to shop for a home loan they can afford now — and in the future.