One of the biggest obstacles standing between you and that house or condo you want to buy may be your credit worthiness.
And, who is it that tells your lender whether or not you are worthy of getting a mortgage? Credit reporting bureaus — known collectively as “The Big 3” (Experian, Trans Union and Equifax), are the first to investigate how risky lending money to you may be.
Let’s take a look at how the determination is made and, more important, why you should be diligent in checking for mistakes made along the way.
The Big 3
Whenever you borrow money, whether it’s for a major purchase such as a car or home or with revolving credit, such as a credit card, the lender will report your repayment history to “The Big 3” (Experian, Trans Union and Equifax).
But that’s just the beginning. These agencies also receive information about you from debt collectors and they purchase information from public records, such as tax liens, judgments, and bankruptcies.
Most, but not all creditors report to all three agencies. Some don’t report to any.
How They Determine Your Credit Worthiness
Each of the three agencies “has its own model for evaluating the information in your credit report and assigning you a credit score,” according to the experts at Equifax. This is why your score may be different with each agency.
A big chunk of your credit score is determined by the types of credit accounts you have and how many you have.
Equifax, for example, bases 15 percent of its determination on these factors.
Payment history, however, is the most important factor.
The Big 3 Are Only Part Of The Story
The three credit reporting agencies report to credit scoring companies, such as FICO®, short for Fair Isaac Corporation. About 90 percent of lenders in the country use a borrower’s FICO® Score when determining whether or not to approve a loan.
FICO® examines each credit report, looking for the following:
- Payment history – accounts for 35 percent of the credit score
- Amount of money owed – makes up 30 percent of the credit score
- Length of credit history – 15 percent of the credit score
- New credit and credit mix – each make up 10 percent of the borrower’s credit score
The company then assigns you a credit risk score, from 300 (considered poor) to 850. Borrowers with credit scores of 740 or higher qualify for the lowest mortgage interest rates from the majority of lenders.
Those with scores lower than 620 will find it challenging to obtain a loan and, if they do manage to get approved, will typically pay higher interest rates.
I work with some lenders that will lend down to a 580 FICO score. The largest determinant for Buyers with less than a 620 credit score is your credit profile.
Everybody Makes Mistakes
Your credit score is only as good as the information supplied to the credit reporting agencies. And, errors are common.
“As many as 42 million Americans have errors on their credit reports,” according to CNN Money
Some of these mistakes are egregious enough to ding the consumers’ credit scores. When you’re getting your finances in order to go after that loan preapproval letter, check your credit reports (from all three agencies) carefully.
Some of the most common errors, according to the Federal Trade Commission, include:
- Identity information – Ensure that your name, address and social security number are accurate. “Mixed files,” those that contain information from two consumers with similar names, are common.
- Accounts – Check each account to ensure that it is truly yours. Identity theft is another common reason for errors in a credit report.
- Status – Check that the status of each account (open or closed) is listed correctly.
- Delinquent accounts – Verify that an account listed as delinquent is actually delinquent.
- Dates – Each account should list when the account was opened, closed and the date of the last payment. Ensure these dates are correct.
- Double entries – Dispute any debt that is listed more than once, even if they have different account names or different creditor names.
- Corrected information – If you’ve received a correction to a previous dispute, ensure that the information in the current report remains corrected.
- Balances and limits – Check all the outstanding balances and credit limits to ensure they’re correct.
How To Correct Errors In Your Credit Reports
Each credit report includes information on how to dispute information contained in it.
- Equifax – handles all their disputes online. Learn more, here.
- Equifax – they, too, handle all disputes online. Go to equifax.com to get the details.
- TransUnion – dispute your credit report online, by mail or phone.
The dispute process takes time, so start it as soon as you’ve decided to purchase a home.
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