debt

Improve credit score before buying home

Steve BucciDear Debt Adviser,
I decided it's time to save money, so I took a new homebuyers class through the local Home Headquarters. The step after finishing the class is to get preapproved for a mortgage. Getting homebuyer counseling would be the next step. I recently applied for a mortgage through my credit union, and I have one score they feel needs to be fixed before they will approve a loan. How can I take care of my past errors in a quick way in order to be approved? I feel that every time I take a step forward with this new homebuyer education, nobody wants to talk to me.
-- Michelle

Dear Michelle,
Congratulations on your decision to become a homeowner. Your timing looks to be excellent! Do keep in mind, though, that you will have expenses as an owner that you did not have as a renter. For example, if the sink starts leaking, you won't be able to call the landlord to fix it. That will become your responsibility. So, just be sure to have some dedicated savings in place for home repair and maintenance in addition to good credit.

From what you have described with your credit union, it sounds like you may have an error on one of your credit reports. You may have already requested copies of your credit reports as part of the new homebuyer class, but if you did not, go ahead and order your reports for free at AnnualCreditReport.com. Carefully review each bureau's report for errors, and dispute any with the bureau that reported. You can file a dispute online at the bureau's website.

Another explanation of your score discrepancy may be one bureau's credit-scoring model is treating your history differently from the others. Not all scores work the same. The FICO score and the VantageScore give different weights to different items on your credit report. For example, multiple inquiries will hurt your VantageScore more than they will your FICO score. Your credit union lender may not be aware of the differences. Ask that they look carefully at what your credit report shows in addition to how it scores.

There are some discrepancies you may be able to fix quickly and others you won't. For example, say the negative item bringing down your one score is a high balance on one or all of your credit card accounts. To fix this, you can pay down the balance(s). Most models prefer your balances to be less than 30 percent of your total credit limit. By paying down a balance, your score would immediately improve.

However, if the item in question is a charged-off account that you still owe, paying what is owed on the account will not immediately improve your credit score. The damage was done when the account charged off. But most lenders, particularly mortgage lenders, will want you to pay anything that is still owed, even if it doesn't improve your score right away.

The reason codes found on your credit reports are another helpful resource. The bureaus will list four specific actions that would help improve your credit. Again, some may be quick fixes, and others may not be quick.

My other suggestion is to get a second or third opinion from different lenders. You may be surprised to find that your credit is more than good enough to qualify for a mortgage with another lender. I suggest you bring them the credit reports you already have and ask their opinion. Having them pull additional reports may further lower your score. When you are ready, try to do your mortgage shopping in a 14- to 45-day range. Depending on the type of score and version used, multiple inquires will only count as one inquiry to account for routine loan shopping.

Taking a homebuyer class is a great way to ensure you're ready for homeownership. Don't get discouraged -- you will reach your goal.

Good luck!

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