Credit is one of the most important aspects of homebuying. Below are several tips from Buying a House on a Shoestring, featuring experts such as Craig Watts of Fair Isaac, the creators of the FICO credit scoring system and Maxine Sweet of Experian, one of the three main credit bureaus. (As a heads-up, if you need credit help, readers of Buying a House on a Shoestring have access to a free credit help session, see Chapter 3, page 59.) Below is just a taste.
Piper Nichole: When should you start looking at your credit report before deciding to buy? About how long does it take to improve if your credit needs help?
Craig Watts of Fair Isaac, the creators of the FICO credit scoring system: For most people, checking their FICO scores six months before applying for a major loan will give them a good idea of their credit potential and allow them enough time to correct genuine errors on the credit report and pay down accounts with high balances, before approaching lenders with loan applications.
Piper Nichole: What do we often not know about credit that we really should know?
Craig Watts, Fair Isaac: I often find that I need to explain to active credit-card users that paying their credit cards off entirely every month doesn’t mean their credit reports will show zero or even low balances for those accounts. That’s because lenders typically report to the credit bureaus the most recent outstanding balance that was billed to the consumer. And active card users often show a sizeable balance owed on their credit card bills. So it may not be enough to pay down the balance, the person also may want to use that card very sparingly (or not at all) for the last couple of months prior to applying for the loan, for purposes of improving their FICO score.
Piper Nichole: How does your credit history affect your loan options and interest rate?
Maxine Sweet, Experian’s vice president of public education: Lenders price their services according to risk. The higher your risk, the more likely you won’t pay as agreed. So, if your credit history shows that you are extremely low risk, you will pay lower down payment or whatever is appropriate for the transaction.
Piper Nichole: What is ballpark considered excellent, average or poor credit?
Maxine Sweet, Experian: It varies by lender depending on the type of service. For some credit services, as long as your credit history is average or above, you will get the standard rate and if you are below average, you may be declined. In others, there are pricing levels. The Website, www.nationalscoreindex.com, contains information about the national average credit score, in addition to average credit scores in regions, states, and local areas. Consumers can also compare their debt level, late payments, and credit usage across the nation.
Piper Nichole: What is your advice for consumers?
Luci Duni, director of consumer education for TransUnion’s TrueCredit.com: Buying a home is probably the single largest investment most people make in a lifetime. By preparing yourself and your credit profile before a home purchase, you can ensure a smooth finance process and can potentially save thousands on your loan. Start by checking your credit reports from TransUnion, Equifax and Experian.
For more information, check out Buying a House on a Shoestring | For Sale By Owner Handbook – PIPER NICHOLE
