One of the biggest obstacles standing between you and that house or condo you want to buy may be your credit worthiness.
And, who is it that tells your lender whether or not you are worthy of getting a mortgage? Credit reporting bureaus — known collectively as “The Big 3” (Experian, Trans Union and Equifax), are the first to investigate how risky lending money to you may be.
Let’s take a look at how the determination is made and, more important, why you should be diligent in checking for mistakes made along the way.
Whenever you borrow money, whether it’s for a major purchase such as a car or home or with revolving credit, such as a charge card, the lender will report your repayment history to the Big 3.
But that’s just the beginning. These agencies also receive information about you from debt collectors and they purchase information from public records, such as tax liens, judgments and bankruptcies.
Most, but not all creditors report to all three agencies. Some don’t report to any.
Each of the three agencies “has its own model for evaluating the information in your credit report and assigning you a credit score,” according to the experts at Equifax. This is why your score may be different with each agency.
A big chunk of your credit score is determined by the types of credit accounts you have and how many you have.
Equifax, for example, bases 15 percent of its determination on these factors.
Payment history, however, is the most important factor.
The three credit reporting agencies report to credit scoring companies, such as FICO®, short for Fair Isaac Corporation. About 90 percent of lenders in the country use a borrower’s FICO® Score when determining whether or not to approve a loan.
FICO® examines each credit report, looking for the following:
The company then assigns you a credit risk score, from 300 (considered poor) to 850. Borrowers with credit scores of 740 or higher qualifiy for the lowest mortgage interest rates from the majority of lenders.
Those with scores lower than 620 will find it challenging to obtain a loan and, if they do manage to get approved, will typically pay much higher interest rates.
Your credit score is only as good as the information supplied to the credit reporting agencies. And, errors are common.
“As many as 42 million Americans have errors on their credit reports,” according to CNN Money
Some of these mistakes are egregious enough to ding the consumers’ credit scores. When you’re getting your finances in order to go after that loan preapproval letter, check your credit reports (from all three agencies) carefully.
Some of the most common errors, according to the Federal Trade Commission, include:
Each credit report includes information on how to dispute information contained in it.
The dispute process takes time, so start it as soon as you’ve decided to purchase a home.
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