Credit Scores and Your Home Loan

Credit scores are a critical component for lenders trying to approve home loan borrowers. Multiple studies by the Federal Home Loan Mortgage Corporation (usually called Freddie Mac) have shown that credit scores are some of the best indicators for a borrower's long term performance. So, what exactly does your credit report show?

The basic information in your report identifies you and is updated as you apply to various lenders. This information includes your name, date of birth, social security number, address, and job history.

Your credit report also shows the lines of credit that you've previously established, such as car loans, home mortgages, and credit cards. Each line of credit shows the date that it was opened, what you currently owe, a history of payment, and how much you're allowed to borrow. These credit accounts basically show a likelihood of spreading yourself too thin financially. Although it's good to have some of these items in your report (otherwise, you wouldn't have a credit history), it can actually hurt you to have too many accounts currently opened. So, if you have more than, say, three or four credit cards, it would be beneficial for you to close some of the accounts that you don't use. Credit counselors can help you determine ways to improve your credit and can give you advice about such strategies.

A report also gives a history of everyone who has accessed it, including you. When you access your own credit report (which you should do periodically in order to check for errors), that's considered a voluntary inquiry. The report also shows involuntary inquiries, which is when lenders request your report for getting you approved. Lenders only order a copy of your credit report if you apply to them for a loan, and you have to give them authorization to do this. When you have five or more lender inquiries in a year or so, this can raise red flags for lenders. Having too many inquiries suggests that you may be requesting a lot of money that you don't have - maybe you've maxed out credit cards, or you've recently bought a lot of items that you can't really afford. So, keep this history in mind when you apply for loans.

The last information on credit reports shows whether you have overdue items such as foreclosures, bankruptcies, property liens, or legal suits. This kind of kind of information goes on public records due to collection agencies, and it can major damage to a borrower's ability to get approved for future loans. In fact, this fourth section can cause the most harm on the entire credit report for borrowers.

If you have questions about your credit report - or questions about how to improve your credit report - be sure to talk with a credit counselor. If you're considering buying a home, the earlier you start on building your credit report, the better your chances will be of getting the home loan you need.

Lee Keadle is a Realtor on James Island South Carolina. Let Lee be your Charleston real estate guide!

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