Do you have questions about credit and the role it plays in buying a home? Find answers to common credit questions below.
What is a credit history?
Your credit history—how you've borrowed and repaid money in the past—plays a big role in your ability to purchase a home. It's one factor used to determine your credit score, often called a FICO score. Credit scores range from 300 to 850. Borrowers with higher scores are thought to be less risky and more likely to repay their loan.
How do I establish credit?
Whether you have good or bad credit is determined by when you pay your bills, and the length of time (number of months) it takes you to pay off a bill or credit card charges. All this information is recorded on a credit report.
How do I obtain my credit report?
You can request a copy of your credit report from any of the credit bureaus that operate in the area in which you live. Some charge a fee, but many will provide you with one free copy of your credit report each year. In Massachusetts, there is a law that you may request one free report each year.
For more information on how you can obtain a copy of your credit report, visit www.annualcreditreport.com or one of the three credit bureaus:
Why does my credit report matter to lenders?
Lenders view your history of paying bills and repaying debts as an indication of how you can be expected to pay them in the future. When you apply for a mortgage, the lender will order a credit report to verify current debts and determine how well you have repaid your past debts.
What if my credit report is not perfect?
Your credit history doesn't need to be spotless, but it must show your willingness to repay your debts responsibly. If you have had problems in the past, your more recent record of keeping current on debt payments shows lenders that you've taken corrective measures. If you are currently having credit problems, the lender may determine that you're not ready to buy a home until they are resolved.
NOTE: When you receive your credit report, look at it carefully. Credit reports may be inaccurate or may give a misleading picture of past credit problems that have since been resolved.
How should I resolve credit issues?
A clean credit history is ideal, but if you've had problems in the past, you should try to address them before beginning the homebuying process.
- If you have ever owned a home and your mortgage was foreclosed upon, the credit report will show the foreclosure; be prepared to tell the lender how things are different and what steps you have taken to prevent foreclosure in the future
- If you declared bankruptcy, it will appear on your credit report. Once again, the lender will want you to explain the circumstances of the bankruptcy
- If you had poor credit in the past, lenders will want to see that you have re-established credit and are able to manage your debt
Detailed written letters of explanation for any untimely debt payments are necessary, and can be the main reason that a lender approves a loan they would otherwise reject. Be sure the letter highlights what steps were taken to resolve the problem and how your circumstances have changed.
What if I don’t have a credit history?
If you don’t have any credit cards or have never taken out a loan from a bank, you will have to build a non-traditional credit history, which requires the lender to document your monthly rent payments to previous landlords, and your monthly payment history with utility companies and insurance companies. This type of information helps lenders see a successful track record of debts owed and paid on time.