REALTOR(R): Buyers can avoid problems by understanding credit system
Wednesday, November 30, 2011
It is true that home buyers today are facing tighter credit conditions than in the past, but it is possible to get a loan if you understand how the credit system works and know how to overcome the obstacles. Realtors learned how they can help educate buyers on how to improve their credit score, including things to avoid at the 2011 Realtors Conference & Expo held in Anaheim, Calif., Nov. 11 - 14.
According to the National Association of REALTORS®, 18 percent of its members reported contract failures in recent months, twice as many as last year, due to declined mortgage applications, failures in loan underwriting as a consequence of appraised values coming in below the negotiated price, or other problems. In many cases, understanding how the credit system works can help buyers avoid problems, according to Chandra Hall, a Realtor and real estate instructor from Colorado Springs, Colo.
In a presentation entitled Cracking the Credit Code, Hall explained that an individual’s credit score is the key to his or her personal economic health. “Your credit score can affect where you work, what car you can drive, how much you pay for insurance and where you live,” Hall said. “It’s imperative to know how credit scoring works and how to achieve the highest possible score.”
Credit scores are derived from payment histories using a wide range of creditors, including credit card companies, home loans, car loans and department stores. Information also is obtained from court records, which can include bankruptcy filings, tax liens and judgments. “A credit score is simply a numerical representation of your statistical likelihood to repay credit that has been extended to you,” Hall said.
The most widely used model for assigning the statistical probability of repaying debt was developed by Fair Isaac & Company, and is called a FICO score. The scores range from 300 to 850 - the higher the score, the better the credit rating. VantageScore, a newer system developed by the credit reporting bureaus, has gained traction in recent years, with scores ranging from 501 to 990.
According to NAR, the average credit score for home buyers using conventional mortgages rose to 760 in 2010 from 717 in 2007. A score of 640 is considered to be a minimum score to get a mortgage, but varies among lenders. Twenty-five percent of Americans have credit scores below 599, nearly double the level of two years ago.
“If you’re planning to apply for a mortgage, don’t close an account within six to 12 months in advance. Keep older accounts, even if they’re unused, because the average age of credit accounts is a factor in scoring performance over time,” said Hall.
Silicon Valley Association of REALTORS® president Gene Lentz advises prospective buyers to always pay their bills on time. “Also, do not apply for more credit or make a large purchase, such as buy a car, before you apply for a mortgage,” added Lentz.
It is always good to check and make sure there are no errors in your personal credit file. If you find that there are errors, you may revise, delete old information, inform others of a dispute, or trace who pulled or issued a report. You may obtain a free copy of your credit report by contacting one of three credit reporting companies: Equifax, Experian or TransUnion.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.