For those considering a home purchase, now is a very strategic time to act. The Federal Reserve is easing off its quantitative easing program, which is causing interest rates to rise. In addition, the price of consumer goods is rising but the dollar is weakening. Home values are also on the rise; but, these trends present a wonderful opportunity. Interest rates are still quite low and home prices remain affordable.
Putting it all together, buying a home now will be a terrific investment in the future. However, there are still things to deal with in order to get a mortgage. These include taking a close look at your credit file from each of the reporting agencies: Equifax, TransUnion, and Experian–all of which can be done free of charge once a year through Annual Credit Report.com.
As many as 40 million consumers in the United States have errors on their credit file, and 20 million contain big mistakes, according to an investigation conducted by CBS News. So, it’s imperative to get any inaccuracies corrected before you apply for a home loan.
What’s in Your Credit File
A FICO Score consists of five categories: payment history makes-up 35 percent, amounts owed is 30 percent, credit history length accounts for 15 percent, and credit types and new accounts make up 10 percent each.
“One credit repair clinic tactic is to challenge every item in a credit file — negative, positive, or neutral — with the hope of overwhelming the credit bureau into removing information without verifying it. However, credit bureaus often dismiss these challenges on the ground that they are frivolous, a right that credit bureaus have under the Fair Credit Reporting Act. You are better off getting your file and selectively challenging the items that are incomplete or inaccurate.” —Nolo.com
It’s not only these factors which lenders take into consideration. Banks also look at your secondary or “alternative credit”, which includes things like insurance and utilities. In addition, your debt-to-income ratio is measured, the difference between your gross monthly income and your monthly obligations.
Cleaning Up Your Credit for a Home Loan
A score of 760 or higher is preferred by lenders, along with a down payment ranging from about 12 percent up to 20 percent. To get there, start here:
- Order copies of all three credit reports. As mentioned above, this can be done through Annual Credit Report.com once a year for free. Review each very carefully for errors.
- Dispute inaccuracies on your credit file. Don’t do this through the online dispute system; instead, do so in writing and dedicate one sheet for each dispute, including proof with each one.
- Pay off any delinquent accounts. For items which are legitimate and outstanding, contact the creditor and pay off the debt with the agreement it will be reported as paid.
- Reduce your DTI in the meantime. During this process, cut down your debt-to-income ratio by paying off open credit lines and putting a little money in the bank. Your goal is get your DTi to under 35 percent.
- Do not incur new debt. Lenders will check for any new lines of credit, sometimes just a few days before closing, so don’t open new accounts.
Stay with it and you’ll be able to get your finances in order to qualify for a home loan.