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First, understand your credit report
Whether you plan to buy a home in 6 months or a year or 2, you’ve probably been told to request your free credit report to check for errors and to see what a lender can learn about you from the report. As page after page of your report shows up on your computer screen with rows of numbers and unfamiliar phrases, you may wonder exactly how you should read your credit report before you buy a home.
“We usually tell people to request 1 of their 3 free credit reports from either Experian, Equifax or TransUnion every 4 months from AnnualCreditReport.com, but when you’re getting ready to apply for a home loan, we suggest that you get all 3 at once,” says Susan Tiffany, director of personal finance for adults for the Credit Union National Association in Madison, Wisconsin. “All 3 credit bureaus have different reporting patterns and each could have a different error that you might need to fix.”
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Here are 6 tips for understanding your credit report – and how to correct errors — when you’re preparing to buy a home.
Read your credit report like a lender
“When lenders read your credit report, they’ll be looking for issues such as a problem making your mortgage payments on time, a high level of debt and the maturity of your credit,” says Jeffrey Taylor, managing partner of Digital Risk, a provider of mortgage processing services and risk analytics in Maitland, Florida. “If you have a four- or five-year history with a major credit card, that’s better than six months with a local store credit card.”
A pattern of late payments, especially recently, is one of the worst things to have on your credit report, says Patrick Cunningham, vice president and partner of HST Mortgage in Fairfax, Virginia.
“Recent late payments are even worse than an old judgment or lien that shows up as satisfied on your report,” says Cunningham. “The other thing that will stop a loan in its tracks is a tax lien or judgment that hasn’t been satisfied.”
Keeping in mind what lenders are looking for, you should work your way through your credit report to check for accuracy and negative information. According to a Federal Trade Commission report in 2013, 1 in 4 consumers identified errors on their credit reports that might affect their credit scores.
Check your ID
The first section on your credit report will have your name, address and previous addresses, but before you skim past this, check these for accuracy. Cunningham says even people with good credit need to make sure that the basic information on all three credit reports is accurate because an inaccuracy will need to be corrected and can cause a delay when you’re getting ready to settle on your home. Your credit report typically includes your Social Security number and can also include phone numbers and employers.
“If you have a common name, you may find an unfamiliar address on your credit report,” Taylor says. “You should go online to correct this in case your credit report is being merged with someone else’s.”
Review your public records
The public records section of your credit report shows any liens, judgments, bankruptcies or foreclosures that have been reported by a court system. If this section is empty, it means you don’t have any of these items on your credit report. If you do have one or more of these items, check carefully to see if they’re yours and if they show as satisfied or settled. Anything unresolved will prevent you from getting a home loan, says Cunningham.
“I had a collection show up on my credit report that wasn’t mine,” Taylor says. “You can make calls directly to the creditor and try to get them to send corrected information to the credit bureaus, but I ended up hiring someone to get my report corrected.”
Any negative information such as a settled lien, judgment or bankruptcy will stay on your report for seven to 10 years, Tiffany says. A lender may ask you for an explanation of the problem even if it was several years ago.
Look for delinquencies
“Every payment you make is very important, so make sure your credit report shows that you’ve made each one on time,” Taylor says. “Consistency is key when you’re applying for a loan.”
One or two late payments from several years ago isn’t likely to stop you from getting a loan, but you need to have at least 12 months of on-time payments, particularly on a mortgage, to qualify for a loan, Cunningham says.
“If you see a late payment report that you know is incorrect, you need to contact your creditor and provide evidence that you made the payment on time,” Cunningham says. “It can take months to correct an error, so that’s why it’s so important to look at your report early in the process of applying for a loan. If the late payment is accurate, then you’ll need to explain what happened and why.”
You can report errors directly to each credit bureau online and contact your creditors, as well.
Check your credit balances and limits
Make sure all the accounts on your credit report are actually yours, Taylor says.
“The only accounts you should have on your report are those with your name as a primary user of the account,” he says.
Cunningham says most creditors accurately report credit limits, but if yours isn’t right, you can contact the creditor to ask for a correction.
“Your balance is a little trickier because it’s a snapshot of a specific day,” Cunningham says. “Even if you pay your credit card in full each month, it could show a balance if the creditor reports on the day before your payment goes through.”
When you’re applying for a home loan, it’s best to avoid charging items to your credit card even if you plan to pay in full because it can look as if you have more debt and a higher utilization of credit.
“If you can do it, pay down your balances at least 60 days before you apply for a mortgage to 30 percent or less of the limit,” says Taylor.
Investigate your inquiries
Inquiries refer to a request for your credit report by a company where you applied for credit, insurance or a loan; in addition, inquiries can be made for account monitoring by existing creditors, a job application or by you, but those are not visible to lenders when they check your credit. A handful of credit checks by different companies over the course of a year won’t hurt your loan application, but if you’ve applied for a lot of credit, it can impact your credit profile.
“If you’re on the bubble of qualifying for a loan and the lender sees a lot of inquiries for credit cards and store cards, it could hurt you because it looks like you’re trying to stretch your cash flow,” Tiffany says.
If you see inquiries on your credit report that you didn’t make, this is a sign that someone might be trying to steal your identity and is applying for credit in your name, Cunningham says.
“You should immediately freeze your credit, call every company that shows up on your report and contact the credit bureaus, too,” Cunningham says.