By Ask Your Realtor

By the Silicon Valley Association of Realtors

Establishing and maintaining a good credit report is extremely important for purchasing a home. When it’s time to obtain a home loan, a home buyer’s credit history is the main way that a mortgage lender can gauge a person’s ability to manage money and loans. Don’t wait until it’s too late to pay attention to credit health.

Those sporadic payments to the credit card company after graduating from college may seriously hurt the ability to secure a mortgage. Late payments on current credit cards or a high credit balance with a number of credit cards could also jeopardize getting a loan.

Now that home buyers have the ability to get a copy of their credit report online, they can check on problem areas and make sure the report is accurate. It is recommended to check out a credit report at least two months before applying for a loan.

Consumers can get their credit report online at a cost of $8 from one of three main sources lenders use: Experian at http://www.experian.com, Trans Union LLC at http://www.transunion.com, and Equifax at http://www.equifax.com.

It is important to carefully review the reports and take care of any discrepancies or inaccuracies that may exist. While some credit report companies will take information over the phone, it is advisable to put the request or correction in writing. Since mortgage lenders generate a credit score from those reports, it is good to know what information they will see when they look at the report.

Paying bills on time is one of the most important ways to manage credit in a responsible way. Since credit scores are based on the most current history, it’s not too late to start. Keeping credit card balances low is another way to manage credit responsibly. While credit shows the ability to pay bills and is key to the creation of a credit score, using credit cards by maxing them out with charges close to the limit could affect the final credit score in a negative way.

A credit score, the statistical method by which mortgage lenders determine the ability to pay back a loan, is based on a number of factors. Most credit scores are based on FICO scores, created by Fair Isaac & Co. Inc., a company that combines data analysis and technology to enhance an industry’s decision-making. This mathematical scoring method considers an applicant’s records of student loans, credit card bills and public records like tax liens and bankruptcies. The credit review may also include the frequency of applying for credit cards and the total amount owed.

Mortgage lenders also take into consideration other information besides the credit score when evaluating a loan application. They may look at employment history, whether a person is self-employed or not, and debt payments in relation to current income. Savings patterns and the amount of savings may be examined as well. The lender then looks at the type of loan requested, the value of the property to be purchased, and the amount of the down payment.

Demonstrating the ability to responsibly manage money and debt is a key factor when embarking on the purchase of a home. Making the effort to review credit history now, before it’s needed, is one way to get ahead in the home buying process.

Information in this column is provided by members of the Silicon Valley Association of Realtors at www.siliconvalley-realtors.org. Send questions on any topic to jnewton@jnpr.com.