5 credit steps to take before house hunting
By Susan Johnston Taylor
April 27, 2015
As house-hunting season gears up, you and other prospective buyers across the country may be scouring the real estate listings and hitting the open house circuit.
But before you hit the streets, is your credit strong enough to qualify you for a mortgage?
Unfortunately, having a decent-sized down payment and a savvy real estate agent may not be enough to land you that perfect property. That's because, in addition to verifying your employment history and assets, mortgage lenders will also want to check your credit. If your file contains problems such as inaccurate information or a forgotten account that went to collections, it could dash your dreams of homeownership, at least temporarily.
“In a lot of places, the housing market is moving very quickly,” says Cara Pierce, a Fresno, California-based housing counselor with the national nonprofit ClearPoint Credit Counseling Solutions. “If you went into a lender and you haven't checked your credit report, you could find out there's something on there that needs to be disputed and taken off. You might have great income, you might have money for a down payment, but something on your credit report [could mess up your mortgage application].” By the time you get the problem resolved, the property could be off the market, she adds.
Here's a look at strategies to help you get your credit in shape before you buy a home.
1. Check your credit reports well in advance. Consumers are entitled to view their free credit report from each of the three credit bureaus (Equifax, TransUnion and Experian) once per year at AnnualCreditReport.com. Request your reports at least 12 months in advance of when you plan to shop for a mortgage, recommends Bruce McClary, a spokesperson for the National Foundation for Credit Counseling. “Look with a microscope at everything,” he says. “Even the smallest thing could have a negative impact.” In fact, a study released by the Federal Trade Commission in 2013 found that one in four consumers spotted errors on their credit report that could impact their credit score. If you notice any errors — for instance, an account that doesn't belong to you — a year should give you enough time to clear things up. Or if you need to work on paying down high balances, you'll want to know that well in advance of when you actually need a mortgage.
2. Dispute any inaccuracies. Under the Fair Credit Reporting Act, the credit bureaus and the organization providing the information are responsible for correcting incomplete or inaccurate information in your credit file. Contact the credit bureau in writing to dispute any errors such as accounts that don't belong to you or outstanding balances that you've already paid. Mixed up credit files, for instance, “[happen] a lot with people who have a very common name,” Pierce explains. Watch out for evidence of identity theft — accounts you don't recognize or addresses you've never had.
“If you went into a lender and you haven't checked your credit report, you could find out there's something on there that needs to be disputed and taken off.”
–Cara Pierce, ClearPoint Credit Counseling Solutions
The credit bureau is required to investigate items you flag as inaccurate and forward the information to the company providing the information. Pierce says it could take around 30 to 60 days to get these types of issues resolved, so start the dispute process well in advance of house-hunting. Another reason to check your credit reports well in advance: A pending dispute on your file can jeopardize your loan application.
3. Pay down high balances. The amount of money you owe (expressed as a portion of your total available credit) makes up 30 percent of your FICO score, so lowering your total credit utilization by paying down your balances will boost your score. Keep your credit card balances as close to zero as possible, and McClary advises your balance certainly not go over 10 percent of your available credit. Add to that, paying on time each month impacts 35 percent of your score. So, by paying in full and on time each month, you are aiding well over half of your FICO score, the dominant scoring model.
Lenders may want to see that you've paid off any delinquent debts, even small medical bills. “If there is any little thing hanging out there, now might be the time to pay those off,” Pierce says. “If it's 6½ years old and you haven't made a payment on it in 6½ years, it'll fall off your credit report in six months. But if you want to buy a house in the next six months, you probably need to pay it off.”
4. Add a consumer statement to explain any issues. Some issues may still appear on your credit report even after a year of timely payments. In that case, you can add a 100-word consumer statement to your credit report explaining in your own words why your report might be less than perfect. If, for instance, you had credit problems in the past due to a one-time circumstance such as an illness, divorce or job loss, but you're bringing things current, here's your chance to explain. Each credit bureau has its own process for doing so, and it may require that your statement be listed in conjunction with a dispute you've filed. Visit each credit bureau's website for more information: Equifax, TransUnion and Experian.
“If it is in relation to an unresolved issue, as a lender I would always appreciate it when there's something that can be explained,” McClary says. “It shows the consumer is proactive in addressing some of the issues that might be negatively impacting their credit. Accompany that consumer statement with some type of documentation to further support your story.” Fortunately, the negative impact of credit problems on your score diminishes over time. “Generally, lenders are much more interested in what's happened in the past 12-24 months than they are three to four years ago,” Pierce says.
5. Avoid messing with your credit. Once you're about six months away from buying a home, you've hopefully resolved any issues and should be focused on maintaining the status quo. Don't apply for new credit (which can temporarily lower your score) or close any existing accounts. As tempting as it might be to charge furniture and other items for your new home, wait until after closing day to make major purchases that could increase your credit usage.
“You really need to think about the things that you can do to at least keep your credit healthy,” McClary says.