Unless you're independently wealthy, it takes good credit to buy a home with a competitive, low interest rate mortgage loan.
Most of us start life with no credit - and "no" credit falls somewhere between good credit and bad credit. If you think of owning a home as a financial goal, then it makes sense to plan your property purchase strategically. By strategically, we mean planning and preparing for your home purchase just like you would plan and prepare for any other large financial commitment.
We suggest that you plan your new home purchase well in advance of when you actually expect to purchase Real Estate. Part of that plan should include an honest and thorough assessment of your credit rating. Knowing your credit rating and a little bit about credit scoring will help you know what you must do in order to qualify for a competitive rate loan.
You can learn about your credit score is by contacting one or more of the three major credit reporting agencies.
Equifax
PO Box 105873
Atlanta, GA 30348
(800) 685-1111
www.equifax.com
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Experian
475 Anton Blvd.
Costa Mesa, CA 92626
(888) 397-3742
(714) 830-7000
www.experian.com
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TransUnion
PO Box 34012
Fullerton, CA 92834
(800) 680-7289
(714) 447-6032 Fax
www.transunion.com
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Information provided by these credit reporting agencies is used by many lenders to apply "credit scoring" formulas against your loan origination package. There is no known, public formula for determining exactly how your loan application is approved. Each lender has their own methods and credit formulas for determining the suitability of an application. In general, however, they look at these primary criteria:
- The length of your credit history
- Your current level of indebtedness
- Negative/late payment habits
- Current derogatory payment practices
- The types of credit you have
- How often you've applied for credit
- How much consumer credit you have
- The number of credit inquires for a specific period of time
Buying your home is going to take planning and preparation in several areas. The most important of these are:
- Establishing a timeframe for buying a home or upgrading to a better home
- Researching the current state of your credit profile
- Making a realistic assessment of your household income and its projected growth
- Controlling your spending habits to allow for accumulation of cash and liquid securities
- Managing personal finances so you have a superb payment history on existing credit
There are other items, of course - but these personal finance management factors are pivotal to obtaining a quality loan with a competitive interest rate and favorable terms on a timely basis.
Credit scoring will place you in one of 3 categories for the most traditional home mortgage loans. These credit profiles are as follows:
- If you have a score of 650 or greater, most of the time you will be considered an A+ loan. The underwriting process will be "factual" and probably somewhat automated. What this translates to for you is obtaining a home loan near the bottom of the interest table in a relatively short period of time. If you do the math, for many of the jumbo loans common today - the lower interest rates can save hundreds of thousands of dollars over the life of a loan. It is well worth the planning and discipline to build a favorable credit profile.
- If your score falls between 620 to 650 - you will probably find that you can still obtain "A" loan rates but the loan processing and underwriting time involved are a bit longer. It is possible that some "issues" have come up on your application and it is necessary for you to write letters of explanation, get additional supporting documentation or even take action to remove an incorrect or inaccurate item on your credit profile.
- If your score falls below 620, it is likely that you will not be able to obtain prime interest rate loans. This doesn't mean that you can't buy a house, however. There are lenders who specialize in sub prime credit and higher interest rate loans for new home buyers not possessing a "prime credit" profile. Your mortgage broker can guide you in this area.
Keeping your credit profile above a "sub prime" rating is an important part of maturing your ability to accumulate wealth and obtain competitive low interest home loans. Patience, discipline and "accountability" are important personal traits to develop in your growth toward home ownership and financial independence. If for some reason, you have acquired derogatory marks or "credit dings" - you have many options for fixing these problems. If you are overburdened with dept, you may want to start with a debt negotiation firm such as US Debt Networks.
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