A credit score is developed from a credit report. A credit report is essentially a summary of credit history (e.g. your borrowing and repayment track record with banks, credit card companies, and other creditors, collection matters, credit inquiries, judgments against you, bankruptcy history, and various personal information, such as: name, address, social security number, etc.). Good credit reports can be the difference between easily obtaining a loan for the property you want and being unable to locate suitable financing for a property. Your credit rating may also be a determining factor in whether or not you are able to obtain financing at favorable interest rates.
Many credit reports contain mistakes or inaccurate information. Whether you are a victim of such mistakes or just have less than perfect credit, checking your credit rating at the onset of a purchase transaction will allow for time to fix or repair a credit rating, which can take between 90 days to more than a year. So before you begin searching for the right home or investment property, and even before you start looking for a loan, it is a good idea to obtain your credit report and obtain credit scores.
Check your credit reports from all of the credit reporting agencies. Federal regulations in the United States give consumers access to one free credit report each year from all three of the current reporting agencies. Several websites and services offer free credit reports from all three agencies (beware: some of these sites are not free). But even if you use a pay site to check your credit reports, if you are able to fix or make repairs to your report(s) and score(s), the money you could save on your loan by having a lower interest rate will likely more than offset the cost of paying for the reports.
Checking your credit reports and credit scores can be done very quickly and should be done on an annual basis to ensure no errors remain on your credit reports, see whether any identity theft has occurred, and to work on increasing your credit score. Doing so will ensure that when you are ready to purchase a new property, your credit looks top notch to a lender.
Scoring factors for credit scores include:
- length of credit history (If you just started borrowing money last year, a lender doesn’t have much to base a decision on) – Truth: Longer is generally better, when it comes to credit history;
- payment history (have you paid bills early, on-time, or late?) – Truth: Paying early and on time is always better than paying late, when it comes to credit history;
- amounts owed or outstanding (the total outstanding debt/overall amount you owe as of the date of the reporting) – Truth: there is no optimal amount owed, this factor is considered after determining the types of credit and what the borrower can afford, but in general, paying down debt, helps credit scores;
- types of credit (loans on assets that historically appreciate v. credit card debt or other types of revolving credit) – Truth: loans on appreciating assets are typically better for credit scores, too much revolving credit can hurt a credit score; and
- amount of new credit (recent increases in credit limits or recent applications for new credit) – Truth: if you are applying for a loan on property, it is a good idea to consult with a credit expert or your mortgage consultant before purchasing a new luxury car or making other major purchases.
Different creditors use credit scores differently when performing credit reviews and making lending decisions. One creditor may provide a lower interest rate to a borrower with a 750 score than a borrower with a 749 score. Another creditor may use an entirely different analysis. The type of loan involved may also have an impact on loan qualification and interest rates (e.g. jumbo mortgages, Federal Housing Administration or "FHA" mortgages, Veteran’s Administration or "VA" mortgages, low-down payment conventional mortgages, etc.). These differences in loan types and proprietary lender decision-making steps will play a part in the type of loan you obtain and the lender you choose.
Many creditors use FICO as their primary means of determining loan qualification and interest rate for those applying for a loan. "FICO," originally called Fair, Isaac, and Company, provides credit analysis and decision making services for financial services companies (e.g. banks/lenders). The general FICO scores and the FICO mortgage scores range from 350 to 850. The three major credit bureaus have also created a new credit rating product in an attempt to compete with FICO, called VantageScore, which has experienced some initial success. Whichever credit score is used, without a quality credit score from a reputable scoring company, lenders may seek higher down payments before providing purchase funding (even more of a down payment if the property being purchased is investment property instead of a primary residence).
In the end, you may be surprised by the extent of your purchase power based on your credit report(s) and credit score(s). After being approved for a loan, the ultimate decision on how big of a loan to accept and how much payment you can afford rests solely with you and your knowledge of your finances and financial stability.
If you are unable to acquire satisfactory financing for your real property purchase, you are not without options. Anyone may determine what is needed to repair a bad credit report and credit score, or the needed increase in income and/or down payment availability. If traditional financing is unlikely to be obtained or there is more urgency for the purchase, consider these alternatives: (1) obtaining an investor to partner with for the acquisition, (2) seeking non-traditional or "hard money" private loans, (3) finding a seller who is willing to accept a promissory note for part of the purchase price (e.g. "seller financing" or "owner carry" terms), (4) using retirement or brokerage account funds, and (5) friend and family loans. Of course it is never too early to start looking and educating yourself on the market. If you would like the assistance of a real estate professional for your property search, Real Estate Metro can connect you with an experienced real estate professional for your personal situation and needs. Click the button below to "Get Started."
via:https://www.realestatemetro.com/blog/the-importance-of-credit-scores-and-credit-reports-in-real-estate-purchase-transactions
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