Acceptable credit is another of the primary requirements for getting a mortgage. You should find out what your credit scores are and what’s on your credit report before you go shopping for any kind of loan.
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A credit score is meant to represent how likely you are to repay your debts on time. The most used credit score in the United States is the FICO score. It is named after the Fair Isaac Corporation, which developed the algorithms that convert everything on a credit report into a single score between 300 and 850.
A credit score of 740 or higher makes financing easy.
A high credit score means a lower risk for your lender and a lower interest rate for you. Generally, a credit score of 740 is considered good, but don’t fret if your score is below that, as different loan programs have different benchmarks. The FHA loan program, for example, makes it possible to qualify even with a credit score below 600.
Each person in the United States with a credit history has three credit scores, because there are three major companies that compile credit reports:
Each of these credit-reporting agencies independently collects information about your available credit, your credit balances, and whether or not you pay your bills on time.
For example, if you miss a credit card payment, the credit card company will alert the credit-reporting agencies, who will record it as a negative entry on your credit reports. When the FICO algorithm takes this negative entry into account, your credit scores will drop.
Mishaps on your credit reports can be corrected if you make the necessary calls when you discover a mistake.
However, incorrect information can sometimes find its way onto your credit reports. For example, if one of your relatives has a delinquent credit card balance, and you were named as an authorized user on the account, the credit-reporting agencies might hold it against you even though you never touched that credit card.
You can contact the credit reporting agencies at the phone numbers listed above. By law, each of the agencies is required to give you your credit report for free once every twelve months, at your request. The government-authorized website for this service is AnnualCreditReport.com.
Several types of information are compiled on your credit reports and analyzed to calculate your credit scores, including:
In addition, there are certain things mortgage lenders specifically search for on credit reports. Even if you have a good credit score, negative credit report entries like these can raise red flags for mortgage loan originators:
If you have a late payment recorded on your credit report due to some extenuating circumstance or hardship, you may be able to have it removed by requesting a letter of forgiveness from the debt servicer. For example, if you were late on a mortgage payment one month because you were preoccupied with the aftermath of a car accident, your mortgage servicer might be willing to work with you to clear your credit history. It can’t hurt to ask.
Some people are reluctant to get preapproved for a mortgage because they have heard their credit scores will drop when a lender checks their credit. In reality, though, getting preapproved for a mortgage may not significantly affect your credit scores at all.
Shopping aroundThe credit-reporting agencies can tell when a borrower is shopping around in order to find the best rate, so multiple credit pulls within a short period of time are usually counted as a single credit check, which will do little harm to your credit.