Thinking back to when I bought my home about 8 years ago, it was the first time in my life that I ever saw a breakdown of my credit scores. I remember feeling pleasantly surprised that it was in the good range to qualify for a favorable rate, but I realize now that I should have known where I stood before I began serious house hunting. Lucky for my husband and me, our credit was good enough to move forward with the home buying process, but for many, that’s not the case.
Based on the recent Home Buying and Credit Survey Report by Experian, many people enter into the home loan arena just as green as we did. And for some, an unexpected poor credit rating puts home buying plans on hold.
Take a look at some of the report’s findings.
* More than 2 in 5 homebuyers worried they wouldn’t qualify for best rates and delayed purchasing to improve credit. Of the people who felt they were the most financially prepared, 70 percent of them knew their credit score going in. And, once their credit scores were revealed, 31 percent of people said they were surprised to see something negative.
Keeping tabs on your credit reports and credit scores is wise for so many reasons, but first and foremost, it’s to make sure that someone hasn’t opened a fraudulent account in your name. The longer such fraud goes unnoticed, the bigger the hassle it will be to repair the damage. If your goal is to buy a home, it could definitely set you back for some time.
* Working to improve credit is something that 55 percent of respondents said they did before applying for a home loan. That’s the good news. However, only half said they actually knew their credit score beforehand.
That’s kind of like trying to eat really healthy the week before you go for a physical to try to get better lab results. It doesn’t work that way at the doc or with your credit. You need consistent, good credit behavior over time at least for a few months to see significant progress in your credit score. And knowing which areas need improvement which is revealed when you analyze your detailed credit score report — is half the battle.
* Scary stat: 35 percent of future buyers said they don’t know what to do to improve credit.
If you have poor credit and no idea how to improve it, you probably need to have a conversation with a credit counselor or financial planner before you make a decades-long commitment to pay back hundreds of thousands of dollars involved in a mortgage. It’s hard enough dealing with a hefty house payment and other bills and expenses, but to do so without having a good handle on your finances first is a disaster waiting to happen.
* People are less informed about their credit’s impact on refinance applications. Only 62 percent who plan to refinance their mortgage said credit scores will affect their interest rate.
Once you’re locked into a 30-year mortgage, you might be less concerned about maintaining a stellar credit score. The problem is if you allow your credit score to slip too much, it could come back to bite you if you end up trying to refinance your mortgage at a better interest rate.
Because I bought my house before the real estate market plummeted, I was one of the people who really stood to benefit from a refinance, which would drop my interest rate more than 2.5 percent. My biggest hurdle ended up being that my home value dropped so much that I barely had enough equity to qualify. What I did have going for me, however, was a fantastic credit score. After a couple of frustrating failed attempts, I found a lender that was able to make the refinance happen, but had my credit been subpar, I would have missed out on saving hundreds of dollars per month.
As the survey illustrates, buying a home is often the first major reality check for people that their credit score does matter. Although credit scores matter in order to qualify for an auto loan, an apartment or a job, the stakes are probably the highest for homebuyers.
Don’t wait until you’re attending open houses or meeting with realtors to start thinking about your credit status. Pull your free credit report from the three credit bureaus (Experian, Equifax, and TransUnion) via annualcreditreport.com, and get your credit scores, too (for about $20 each from MyFICO.com. That way, you’ll have time to make necessary improvements, and there will be no surprises.