Check Your Credit

Coping with credit

For many people, exposing their credit records is one of the most difficult parts of buying a house.

Perhaps you let a department-store credit card lapse with a $5 balance due. This kind of glitch is usually easy to fix and won't stand in the way of your loan. Bankruptcy, on the other hand, stays on your record for up to 10 years. Understand how lenders look at credit and take steps to clear your credit before you actually apply for a loan. You'll make the loan process a lot easier.

Your Credit Score: The Magic Number

Lenders are streamlining and even automating at least part of the home loan business. Many lenders—as well as the big players in the secondary mortgage market, Fannie Mae and Freddie Mac—now use credit scoring as one way to speed up the loan process. People with higher credit scores usually obtain lower interest rates, so it can benefit you if your credit is good.

Most consumers never see their credit score when they apply for a loan. Your credit score is a statistical analysis of the likelihood that you'll pay back a loan on time. It draws from approximately 100 variables in your credit report, including delinquent bills, outstanding debts, the number and amount of balances you owe your creditors, and your credit history. Your credit score is a number between 400 and 900. The magic number is anything over 620. If you score above 680, lenders will usually consider you a premium borrower, which makes you eligible for lower rates and better terms. If your number is below 620, however, you are likely to be rejected. Red Flags Lenders don't want to see these on your credit report: Late payments Recent credit inquiries Overextended credit Liens Paycheck garnishments and Bankruptcy.

If a lender turns you down for credit reasons, find out exactly what those reasons were and take steps to remedy the situation:

1. Ask your lender for a copy of your Residential Mortgage Credit Report. This report is from a compilation of your personal credit profile for the past seven years drawn from the three major credit reporting agencies: Equifax, Experian, and Trans Union. It is more detailed than the report you will get from one credit bureau.

2. Review your report and ask the credit bureau to re-investigate any marks you find questionable. The credit bureau should provide a form for you to make this request in writing. After you submit the form, the credit bureau has 30 days to investigate your claim and change your record. If you are correct, or if the creditor who gave you the bad mark can no longer verify the information, the credit bureau must remove those marks from your report. Incidentally, a credit bureau may remove an item summarily if checking the item is more trouble than it's worth.

3. If the information in the report is correct, check the date of the bad mark. With few exceptions (such as bankruptcies) the credit bureau should remove credit information on file for more than seven years.

Bankruptcy

Bankruptcy significantly lowers your credit rating and may stay on your record for up to 10 years. If you declared bankruptcy recently, though, you may still be able to borrow money to buy a house. In addition to credit scoring, lenders rate borrowers from A to E (A-rated borrowers are the best credit risks). If you filed bankruptcy more than a year ago (but less than 10), a lender will probably give you a C rating. As a C-rated borrower, you can expect to pay a higher down payment (20 to 35 percent of the price of the home) and between 1 to 3 percentage points more in interest than an A-rated borrower. If your credit rating is lower than an A, you may also have to bypass commercial banks altogether and go to a mortgage broker that specializes in difficult loans.