The home-buying season is right around the corner. According to John Danaher, president of consumer interactive at credit bureau TransUnion, now is the time to make that finding a loan go as smoothly as possible. He says that involves checking and knowing what your credit standing is and doing work to be preapproved for a loan, so you’re ready when you find the house you want. It helps you set a budget and know how much house you can afford.
The first thing is to look at your credit report and see what your score is. And maybe people don’t know this, but for a real estate transaction, a mortgage lender looks at all three credit reports — TransUnion, Experian, and Equifax.
“On our side, we recommend things to consumers that they can do to improve that score. Utilization is one thing in particular that comes to mind.”
“I don’t know about you, but I tend to overspend over the holidays. Typically in January, I have my lowest credit score of the year because I have the highest utilization on my credit cards. I pay them down, and my score tends to improve.”
“I think we recommend that the optimal utilization should be around 30 percent.”
Then paying your bills on time is the single biggest determinant of your credit score. If you are planning to buy a home, now is not the time to skip a payment. That will have the biggest negative impact on your score. It will do two things: it can drive the interest rate higher, or it could, in certain cases, prevent you from getting a loan.
It’s very critical for folks to pay their bills on time. And to the extent they can have a derogatory item on their credit (such as a very late payment, bankruptcy, tax lien or another negative item), to address or be aware of that.
How long does it take to improve your score?
In some cases, it can happen very quickly. If you pay off your credit cards, you’ll see it next month. If you have a derogatory item, that can stay on your report for seven years.
There have been some changes in the credit scores that get approval, lower scores for example, but approval still comes down to Credit score, debt-to-income ratio and the appraisal or value of property — those three are still the standard pillars of the mortgage industry.
Some people put a freeze on their account following the Equifax data breach. How long before seeking a mortgage should you lift that?
From a TransUnion perspective, it can happen instantaneously. For mortgage lending purposes they are going to pull all three reports. You have to remember where you froze it, how you froze it – online or whatever. You may want to take a day or two to unfreeze them before you apply but definitely make sure they are all unfrozen. It could potentially cause an issue if they can only get one or two out of the three.
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