Yes, in this new market, a great credit score is king. However, when the market was in the height of the frenzy you would often hear: No Creditâ€”No Problem! Five years ago a monkey with an address and a social security card could get a loan. But itâ€™s different now: No Creditâ€”No Way!
Unfortunately for the hundreds of thousands of Americans who got caught in the middle of the market meltdown, there is little chance of getting another mortgage today. Tomorrow, however, is another story.
If you are coming out the other end of the financial meat grinder, trying to buy again after walking away or short selling your home, there is some hope.
Short Sale Survivors: If you succumbed to a short sale, according to the new guidelines, you will have to wait approximately two years to qualify for a Freddie Mac or Fannie Mae or FHA loan.
Foreclosure Survivors: If you walked away or went through foreclosure, you will have to wait at least five years to apply for one of the government-backed mortgages.
Many banks, however, may not be quite so forgiving. There may be more of a cooling-off period before they jump back into the mortgage business with you. But that will be up to the individual banks. Just be prepared for a cold shoulder for a while.
What if You Donâ€™t Have Any Credit?
This will be a hurdle to jump over if, for whatever reason, you lack a credit history or donâ€™t have any credit at all. The solution? Start a history now by obtaining a credit card of some sort. If you lack credit because itâ€™s been in your spouseâ€™s name, then get on the phone and speak with your credit card companies to see what they can do for you. Youâ€™ll want to have at least one card in your own name. If you must apply for credit, do so. Even if youâ€™re the type who pays your bills every month with cash, you can still keep the same habits and pay for your credit card bills in full every month. Having credit doesnâ€™t mean you have to actually use your credit. It just means youâ€™ve been given the responsibility of having access to credit, which is what lenders want to see.
A credit report is a complete history of all your financial activities. It lists your creditors, when you opened your bank accounts, what you owe and to whom, your credit limits and historyâ€•including late payments and any other negative informationâ€•your employment history, marriages, divorces, child support history, bankruptcies, property liens, whose name is on what, etc.â€”itâ€™s all there. When lenders request information, this is what they get, and you want to make sure it is in great shape.
This process gives a numerical value to all aspects of your credit history, factoring in your income, your debt, and your employment history. The past six to twelve months is examined first, so itâ€™s critical to keep current with your bills. Hereâ€™s how the most popular type of scoreâ€”the FICOâ€”breaks down:
760â€“850: Acceptable risk. Someone with a score in the high 700s and up to 850, which is a perfect score, is in the best position to get the best interest rates.
675â€“759: Generally acceptable risk and may compensate for other less attractive aspects of your financial past.
620â€“674: Motivates a closer look at potential risks and may inspire a request for credit documentation and letters of explanation.
500â€“619: This lower score may keep the best loans and terms out of reach, as interest rates for these scores are high.
Below 500: Any score down here falls into the sublender category.
When it comes to mortgage rates, youâ€™ll see that a higher score makes a real dollar difference.Â
Obtain Your Credit Report
If you donâ€™t have a current one, get your credit report now. If there are problems, you need to know about them and address them before you even think about buying. Any serious problems, and sometimes even minor mistakes, can take months to repair.
There are a variety of ways to get your report. Youâ€™re entitled to a free credit report once a year under the FACT Act; just go to www.annualcreditreport.com to retrieve it. You can also obtain one from each of the three large credit bureaus:
The easiest way to access your report right away is to go online at the above-mentioned Web sitesÂ orÂ freecreditreport.com. You will also want your credit score, which is the number that reflects your creditworthiness. In addition to the credit bureaus having their own scoring system, the Fair Isaac Corporation also puts out scores based on its own formula. Known as FICO scores, these are also important to obtain because most lenders will look at them as well. In fact, more than 75 percent of all mortgage companies today accept only FICO scores, and 90 percent of the largest U.S. banks use FICO scores. You can go to www.myfico.com and obtain a report from two of the big bureaus and get your FICO scores, too.
Note: we all have three FICO scoresâ€”one from each of the three major credit reporting agencies. Experian markets and sells the PLUS Score on its Web site. TransUnion sells the TransRisk score under its TrueCredit brand. Equifax is the only bureau Web site where you can order your FICO score directly; Equifaxâ€™s score is marketed as Score Power.Â
I know that all sounds like a bunch of jumble and initials, so to avoid any confusion, I recommend obtaining your FICO scores (from all three bureaus) directly from www.myfico.com.