The home buying experience can be an overwhelming experience that can be exhilarating, fun, stressful and exhausting. The process of securing a mortgage, successfully bidding on a home and completing the transaction can be lengthy, complex and involve seemingly endless professionals. Those professionals may include a buyer’s agent, a loan officer, a home inspector, title […]
Credit matters – polish your credit score and get your best possible interest rate
The supply of homes – single family homes, duplexes, condominiums and townhouses – for sale is well below current demand. This supply shortage has led directly to higher sale prices; today’s real estate market is clearly a seller’s market.
This, combined with interest rates steadily increasing for the past two years, adds up to buyers often settling for homes they may have passed on three, four or even ten years ago.
It’s simply a matter of affordability.
While a home’s purchase price is a major determining factor in a buyer’s mortgage payment, it’s important to remember that mortgage interest rates have a significant effect on monthly payments and what home you can afford.
The components of your mortgage payment
Your mortgage payment is made up of four elements, only two of which you have control:
Principal is the amount of the loan
You have control over principal in that you can choose to purchase a higher- or lower-priced home.
Interest is the price of the money you will borrow to purchase your home. You can secure a lower interest rate by either shopping for the best possible rate – which your lender can do with you – or by taking steps to ensure your credit score is as high as possible. More on this in a moment.
Property taxes are set by taxing authorities and are beyond your control, though property tax rates vary by location.
Private mortgage insurance (PMI) applies to situations in which the homeowner has less than 20% equity in the home, thereby protecting the lender should a homeowner default on the loan.
Homeowner’s insurance – protecting the home in the event of a fire, for example – is paid as part of the monthly mortgage payment and held in escrow until payment is due.
PMI is typically beyond your control; you can shop for lower homeowner’s insurance rates and levels, giving you a bit of control over this element of your mortgage payment.
Know what’s on your credit report
Smart buyers work closely with their lender to get preapproved for a home loan before they start actively shopping. In today’s highly competitive real estate market, buyers often have to move fast to submit a winning offer on a home. Offers submitted by buyers who aren’t preapproved are often ignored by sellers as there is no way to know if the buyer can get financed.
As part of that preapproval process, you should work closely with your lender to review your credit history and assess your credit score. The three major credit bureaus, TransUnion, Equifax and Experian, all track your credit history and can provide you and your lender with a full range of the information that combine to create your score.
When you have that credit score in hand, it’s time to take a close look at everything in it. If you have an extremely high score, say 850, you’ll have no problem not only getting approved, but you’ll also get an attractive interest rate since you’ll be viewed as being highly unlikely to default on your loan.
If your score is lower, then you want to look at what items in your credit history are hurting you. Work with your loan officer to assess these items and identify which can be quickly remedied. These items may include:
If your credit score has been accessed as part of an application for a loan of any type, your score can be adversely affected, usually by approximately seven points. If you’ve had ten inquiries over a year’s time (even if you didn’t authorize the inquiries), that could add up to a 70-point drop in your score, a decrease that can lead directly to you paying a higher interest rate on a mortgage or even being denied financing.
Inaccurate collections entries
Surprisingly, inaccurate collections information may appear in your credit report. These may be completely unrelated to any purchases or financing with which you’ve been involved.
Credit Information from a different person
This may be more common than you might think. If you have a common last name, such as Taylor, Smith or Jones, information about someone with the same name as yours can work its way onto your report. Even people with unusual last names can find a relative’s information on their reports.
Open lines of credit that no longer exist
If you paid off a credit card and then closed the account, that should be reflected in your report. While you may think having a paid off credit card reported as currently active in your report would be a positive, lenders view open lines of credit as a potential liability for borrowers.
Your lender can give you direction
The good news is all of the above – and in some cases, more – can be removed from your credit report in just a few weeks. Under the Fair Credit Reporting Act, you can dispute any incorrect information and the credit reporting bureaus are required to prove the information is correct or to remove it in no more than 30 days.
The key is to dispute incorrect information in writing, that is outline the incorrect information in a physical letter to the reporting bureau and mail it. Chances are good that in one month your credit score will have improved. Remember, even a 50-point increase in your credit score can lead to you being approved for a mortgage or get you a lower interest rate. And even a one-percent reduction in your interest rate can lead to a significantly lower mortgage payment and save you thousands of dollars over the life of the loan.
Our loan officers have exceptional experience and a complete knowledge of how the credit reporting industry works. They’ll work with you, go through your report line by line and identify what you can dispute or correct and instruct you with exactly what steps to take. They’re the experts and they are on your side. Contact one of our loan officers today!