Get The Scoop On Your Credit Report
What’s in it? And why you should care.
Your financial history is constantly being tracked by three major credit bureaus: Equifax, TransUnion and Experian. These companies store all kinds of information, and share it with other companies including financial institutions, insurance companies and employers.
What kind of information is included in my credit report?
Credit reports include:
- Any credit that has been extended to you in the past 7 years – even open lines of credit that you do not currently use
- Bankruptcy information, which is held for 10 years
- Your payment history, including which payments were late and how late they were
- Information on arrests and criminal convictions
Joe and Jenny ran into trouble because they had several open lines of credit, totaling tens of thousands of dollars. Even though they had not actually borrowed large sums of money, the bank saw this as a potential drain on their budget, especially considering their less-than-perfect payment history, and declined their mortgage application.
How can I get a copy of my credit report?
You should check your credit history about six weeks before applying for a car loan, mortgage or job. In fact, it’s a good idea to get a copy of your credit report about once a year so you can check it for accuracy. If Jim had done this, he could have straightened out his “identity crisis” before applying for a loan.
To obtain a copy of your credit report, call all three credit bureaus or apply through their web sites:
- Equifax • (800) 685-1111 • www.equifax.com
- TransUnion • (800) 888-4213 • www.transunion.com
- Experian • (888) 397-3742 • www.experian.com
If you have been denied credit, employment or insurance within the past 60 days, you are entitled to a free report. Otherwise there is a small charge.
What if I find a mistake?
If your credit report contains errors, write a letter to the credit bureau and also to the company or lender where the mistake came from. Include copies of documents that support your claim. Send both letters by certified mail, return receipt requested, and keep copies for your records. It may take time, patience and persistence to straighten out mistakes on your credit report. But in the long run, it’s well worth the effort.
Saving For Your Down Payment
Set a goal.
It’s easier to start saving if you have a specific goal in mind. Sit down with your REALTOR® and discuss your budget and your expectations. Be honest and realistic. You won’t get a $500,000 home if your income is $35,000 a year. It just won’t happen. Decide how much you can afford to spend on monthly mortgage payments, and how much cash you’ll need for your down payment and closing costs. Then make your goal tangible! Cut out pictures of homes and put them on the fridge. Carry a picture of your dream home in your wallet. When you’re tempted to splurge on something else, you’ll have a reminder of your goal right in front of you.
Make a plan.
To reach your goal, you’ll need discipline and determination. You’ll also need a budget. Don’t moan and groan, it won’t be that bad. Get out a pencil and some paper, and make two columns: income and expenses. Now write down how much money comes in, and what it’s spent on. It’s a good idea to track all your expenses in detail for a month or two. You’ll end up with a good idea of where your money is going, and where you might be able to cut back. Part of your plan should include paying off credit cards and other debt. It’d be a shame to have your down payment saved up, and then to be turned down for a mortgage because you’re carrying too much debt.
Get some help.
There are lots of programs out there to assist first-time homebuyers. Your REALTOR® can help guide you to federal, state and local programs that may offer reduced down payments, low-interest down payment loans and other advantages. If you’re lucky enough to have relatives who can help, remember that you can accept up to $10,000 each year as a gift without having to pay any taxes on it.
Use your investments.
This requires careful planning, and you may want to get some professional advice on the ins and outs of tapping into your investments. If you’re thinking of cashing in some long-term investments, you’ll want to know if there are fees, penalties or other charges involved; and you’ll need to carefully consider the possible impact on your retirement years. It’s tempting to take money out for a worthwhile goal like a house, but it’s very hard to put that money back in.
You can do it!
You might have to tighten the old proverbial belt and give up some little luxuries for a while, but it’s well worth the sacrifice to get yourself into the housing market. Once you own your first home, you’ll be on your way to building equity, increasing your net worth and enjoying the American dream.
Mike and Jenny are buying their first home. They have enlisted the help of a terrific REALTOR®, they’ve made an offer on a lovely house in a growing neighborhood, and they are now sitting down with a mortgage lender to discuss some nuts and bolts. Let’s listen in:
Mortgage Lender … “Well, congratulations Mike and Jenny! Based on your debt-to-income ratio, we should be able to approve you for a loan. I’d suggest that you amortize over 30 years, with 2 points and an escrow account for taxes and insurance. You’ll need PMI, so you might want to go with an ARM. Or we could offer you a balloon reset mortgage. What do you think?
Mike and Jenny really have no idea what was just offered to them…
Some terms you’ll need to know
In order to make the best choices for your next mortgage (and impress your friends and family), you need to understand some basic terms. If you still have questions, don’t be afraid to ask questions. Your REALTOR® and your lender will be happy to provide more information.
- Amortization: This is a detailed breakdown of your payments over the life of the loan. An amortization table shows you how much of each payment goes to principal, and how much goes to interest.
- ARM: An Adjustable Rate Mortgage – this means that your rate will vary from year to year. ARM’s generally start out with a lower rate than fixed-rate mortgages, so if you plan to stay in a home for just a few years, this might be the way to go.
- Escrow: These accounts are used to “hold” money. In the case of a homeowner, they’re used to hold tax and insurance payments until the payment is due. Banks and mortgage companies like this arrangement, because they have control over these payments and can make sure they’re made on time.
- Points: When you’re shopping for a mortgage, you’ll be quoted different rates depending on how many points you want to pay. One point equals one percent of your mortgage amount. So, if you were mortgaging $100,000, a point would be $1,000. When you pay points you are paying some of the interest on the loan ahead of time, so you’ll get a lower interest rate.
- PMI: Private Mortgage Insurance – this will be added on to your mortgage payment if you’re putting less than 20% down. In the old days, you’d be stuck paying this forever, but new regulations require lenders to cancel it when your mortgage balance drops to 78% of the original purchase price of your home.