why is credit important when you buy a home
credit responsibly and repay creditors on time has a lot to do with how much access to credit you will have in the
future. Building a solid credit history gives you more buying power when you need it, and that can be especially
valuable when you are buying a home, car etc.
managed credit in the past, and then use that information to determine how likely you are to keep up with payments
in the future. By predicting how well you will manage your debt, the company can measure the risk involved with
lending you money.
someone who has not. Because lenders usually offset risk with higher financing charges, having a better credit
history generally means getting more favorable loan terms. And because some loan options are riskier than others,
good credit may give you more flexibility in structuring your loan. The scores, ranging from 0 to 1000, are numbers
that tell lenders how likely an individual is to repay a loan, or make credit payments on time. The higher the score,
the better the credit risk. Scores of 700+ make A credit grades, 640+ for a B grade, and below 579 fail.
and it's the right thing to do. What goes around, comes around.
Why Is Financial Information Important?
Financial information is important because it impacts so many areas of your life. You need financial information to apply for many forms of credit, and you need financial information to make purchases. If you track your financial information and take other steps to safeguard it, you can protect your buying power.
Your buying power is tied to how much cash you can accumulate at any time. For example, if you want to purchase a new motorcycle, you need thousands of dollars, unless you have the ability to get approved for a consumer loan. Increase your buying power by using financial information to keep a budget and stick to it. The more you can save in your budget, the more money you can put in the bank. One day buying a motorcycle with cash will be possible.
Three major credit bureaus -- TransUnion, Equifax and Experian -- collect information about you. They use your Social Security number to maintain a record of consumer credit accounts you open in your lifetime. If you monitor your credit report, you can take actions to correct errors. Dispute invalid debts and get creditors to update accounts that you've paid off. Boost your credit score by making on-time payments to credit cards, personal loans, mortgages and auto loans. With a higher credit score, you can borrow more money, which equals more buying power.
Financial information collected about you by your bank is easy to steal. Consider when you log into your bank account or credit union account online. A person can phish for your username and password when you log on. If this information is captured, a person can log into your account and transfer your money to another bank. Get to know your bank or credit union's policy for protecting your financial information, such as using 128-bit SSL encryption of data you enter into web forms.
Your consumer credit profile is linked to your Social Security number. If someone knows this number, she can find out most of your financial information. Don't give out a Social Security number without understanding how it will be collected and used by creditors, government agencies, medical providers, insurers and other organizations. At home, lock up any documents that contain your number. You don't want your identity to be stolen because you are careless. It is the key to your financial information. You don't want someone to obtain employment or credit accounts using your Social Security number.
How to Buy a House with Bad Credit
When you want to buy a home, it helps to have good credit. You will have more loan options, will qualify for lower interest rates, and end up with a less expensive mortgage. However, if your credit score is less than stellar there are still options. It will just require a little creativity, patience, alternative outlets for loans, and usually a little extra money. However, also keep in mind that consulting with an expert such as a real estate agent and/or an attorney may save you a lot of money and time in the long run.
Looking Into Government Programs Edit
Why It’s Important to Get Approval in Principle for Your Home Loan
Every year, a handful of would-be home owners make their decision to to lose (1) a lot of money, or (2) the house that they need. They might even go all out and lose both, since every sob story deserves a dramatically appropriate ending. That’s right, I’m talking about people who try to buy a house without Approval in Principle (AIP). Sometimes due to a deficit of credit, but mostly due to a deficit of common sense. So if you’re about to go house hunting, don’t join their ranks:
Approval in Principle (AIP) is an agreement with a bank. Based on your credit history and financial health, a bank will decide whether to approve your home loan. There’s no actual loan that takes place when you get AIP; rather, it’s a guarantee that the bank will extend you the loan when you need it.
In Singapore, the AIP lasts 30 – 90 days. During this period, you can go house shopping with a clear idea of what’s affordable.
They can try to buy a house anyway, which is when the lunacy begins. If someone is denied AIP because they have bad credit, and they don’t have money on them, they’re a huge risk. Selling to them would be like passing your car keys to a hobo because he promised to come back with the money for your BMW. Most property agents don’t like that, which leads to the first problem…
“Let’s just say the last guy who didn’t have AIP abandoned the property. In a pretty dramatic way.”
1. Some Property Agents May Not Work With You
The best property agents maintain a reputation. They’re honest, reliable, and great people to buy a house from. As opposed to the grease bag you’ll be dealing with, if you don’t have AIP.
Good property agents want to avoid problems for their clients. One of those problems is selling a house to someone who, as it turns out, can’t get the home loan to buy it. As such, good property agents avoid people without AIP. They want to deal with people who are guaranteed to have that money, whether in their pockets or in the bank.
And that can make the difference between getting the house you want, and some “last alternative” dengue trap.
What happens if you find a great property with fantastic location, but don’t know if you can afford it? Answer: Give yourself an ulcer and find a religion, that’s what. Because you’ll be stressing out and praying all night, and you’ll constantly worry that someone will swoop in and take it.
“Yes, you did say it was still up for sale. But that was eight minutes ago. Just checking again.”
In fact, without AIP you’re left worrying at every decision. It’s hard to bargain the price of something when you don’t know how the size (or even existence) of your home loan package. The bank may lend you the full amount, or it may lend you a lot less. Would you risk signing the papers anyway?
Then get ready to maybe…
To secure the house, you usually pay a booking fee. Let’s say the fee is 1 % of a $1.5 million home. That’s $15,000. There are people who, could they afford that amount, would have had major surgery and would still be alive right now. So it’s kind of a jerk move to waste that money.
Then again, if you don’t have AIP, this may just happen to you. For example: you assume the bank will lend you the money, and you put down the booking fee. Later, it turns out the bank is willing to lend you exactly enough to buy the welcome mat. Since you can’t afford the house, your booking fee is now gone.
“Don’t worry, people love lending money. I would know, I used to be a loan-shark.”
If your budget is tight, losing that booking fee might mean losing the down payment for the next alternative. The technical term for that situation is “Holy crap, I’m homeless.”
If you know the exact amount of your home loan, you can develop a functional budget. And when you have a clear idea of your disposable income, opportunities open up. For example, say you know the bank will cover all your costs except for $10,000. You have $15,000 to spare right now. You can set aside the $10,000 for the down payment, and immediately invest the remaining $5000 in a fixed deposit, start-up, etc.
“And on page 178, I plan my repayment process in the event of a potential alien or dinosaur attack.”
Knowing the loan size also helps narrow your choices. You’ll get a clear idea of what you can and can’t afford, and so will property agents. They won’t feel a need to press you harder, and you’ll know when to walk away. That’s step one on the road to solid financial decisions.
Although getting an AIP can be a pain, the alternative is far worse. Getting your AIP sorted out can be simple if you know what to do. Here is our quick guide for how to go about getting an AIP.
Step 1: First, you need to decide on one bank you’d like to get your AIP from. It’s usually best to choose the bank that offers the most competitive rates at the time. You can compare the latest home loan rates on MoneySmart. That should give you a sense of which bank to go for. Select the bank you’d like to apply on the Comparison page of the site.
Step 2: A MoneySmart Mortgage Specialist will contact you and provide you with the necessary AIP application form and list of documents you need to prepare. They will help you submit, and expedite your approval. (Free Service because they get paid by the banks.)
Step 3: You get your AIP, and you’re pretty much guaranteed a loan from the bank if you choose to purchase a property within a month.
Note: Your max loan amount may defer slightly from bank to bank, but an AIP from one bank is sufficient to give you a good estimate of what you can afford. When you get an AIP, you’re not committing to take up a loan from that bank. So you are under no obligation. If the rates from that bank are revised upwards, you can always apply for your home loan from another bank. However, if you are taking up a home loan from the same bank, the application process is much smoother if you have already been granted an AIP for your home loan by the bank.
Are you buying a home soon and in need of an AIP, comment and let us know!
I was a freelance writer for over a decade, and covered topics from music to super-contagious foot diseases. I took this job because I believe financial news should be accessible and fun to read. Also, because the assignments don't involve shouting teenagers and debilitating plagues.
Good credit plays an important role in your financial life. Not only is it essential for obvious things like qualifying for a loan or getting a credit card, but also for less obvious things like getting cellular telephone service, renting a car, and perhaps even getting a job. Click here to download the Importance of Credit History and Successful Savings Packet or read below.
WHAT IS A CREDIT REPORT AND SCORE?
A credit score is a three-digit number that measures how likely you are to repay a loan on time. It uses information from your credit report to predict the risk of you not paying that loan back 24 months after scoring.
A credit report is an explanation of your credit history. It states when and where you applied for credit, whom you borrowed money from, and whom you still owe. Your credit report also tells you if you’ve paid off a debt and if you make monthly payments on time.
How can I get a copy of my credit report and score?
The three nationwide consumer reporting companies- Equifax, Experian, and TransUnion are required by The Fair Credit Reporting Act (FCRA) to provide you, at your request, with a free copy of your credit report once every 12 months. (Available at www.annualcreditreport.com)
You will have to pay around $14 to receive an addition credit report within 12 month of when you received your free report. To receive a copy of your credit score, you will have to pay one of the three nationwide consumer reporting companies around $14.
Who do I get help from if I find something wrong?
You are responsible for correcting inaccurate or incomplete information in your report. There are two things you should do if you find an inaccuracy. First, tell the consumer reporting company (where you got the report from), in writing, what information you think is inaccurate. Consumer reporting companies are required to investigate anything in question and must forward all relevant data to the organization that provided the information. Second, tell the creditor or other information provider in writing that you dispute an item.
Who has access to my credit report?
The FCRA specifies who can access your credit report. Those who have access to your credit report include creditors, insurers, employers, and other businesses that use the information in your report to evaluate your applications for credit, insurance, employment, or renting a home.
WHY IS SAVING SO IMPORTANT TO CREDIT?
It is important for all Americans to have savings. Having a savings account allows people to pay for emergencies, gives people financial freedom, and can contribute to a higher credit score. A high credit score can make it easier to rent an apartment, get utility services, and even get a job.
Having a savings account allows people to pay for emergencies on their own instead of turning to high-interest credit cards or payday loans. Not being able to pay off these types of loans can severely affect your credit score.
Having savings allows you to pay your bills on time. Paying your bills on time can lead to a higher credit score.
When it comes to saving money, the sooner you start the better. It's not an act that's accomplished overnight, but a process that happens gradually and grows over time. Just remember, slow and steady wins the race.
Making ends meet can be a challenge. And you may wonder how it's possible to spare anything. But any amount saved - a quarter, a dollar - is progress. Those quarters and dollars add up. As you get into the habit of routinely "paying into your savings" you'll see the money you're setting aside grow.
The first thing you have to do to start saving is take a look at your finances and make sure that you are spending less than you earn.
· Find ways to cut back on spending
· Set up automatic savings
WHY IS GOOD CREDIT MANAGEMENT SO IMPORTANT?
Good credit plays an important role in your financial life. Not only is it essential for obvious things like qualifying for a loan or getting a credit card, but also for less obvious things like getting cellular telephone service, renting a car, and perhaps even getting a job.
Managing your credit will also help you save for a rainy day. A strong credit history, reflected in good credit scores, will let you qualify for lower interest rates and fees, freeing up additional money to set aside for emergencies, retirement, and other smaller unexpected expenses. Decreasing debt and increasing savings reduces stress and leads to greater financial freedom.
The good news is that having good credit is not difficult. Simply follow these five fundamentals of good credit management and you will build and maintain a credit history that will enable you to get the credit you need, when you need it.
5 TIPS FOR BUILDING GOOD CREDIT
To establish a credit report you must have an open, active credit account. To get your first credit account talk to your bank or credit union.
Make at least the minimum payment due each month and never be late. Delinquent payments and payments that don’t meet at least the minimum contractual amount will have the most immediate, negative impact on your credit report and credit scores.
Keeping your balances low as compared to your available credit limits is a sign of good credit management and shows lenders you are a good credit risk. Your utilization rate, also called your balance-to-limit ratio is a key component to credit scores.
Do not apply for multiple accounts in a short period of time. Taking on large amounts of debt in a short time is a sign of high credit risk. Apply for credit when you need it, and only in the amount you need. Just because credit is offered, doesn’t mean you have to accept it.
- Demonstrate good credit habits over long periods of time
In order to have good credit scores you must demonstrate a habit of good credit management over a long period of time.
IS CREDIT REPAIR A GOOD IDEA?
Every day, companies target consumers who have poor credit histories with promises to clean up their credit report so they can get a car loan, a home mortgage, insurance, or even a job once they pay them a fee for the service. The truth is, these companies can’t deliver an improved credit report for you using the tactics they promote. It’s illegal: No one can remove accurate negative information from your credit report.
WHAT IS LOAN CONSOLIDATION?
A Direct Consolidation Loan allows a borrower to consolidate (combine) multiple federal student loans into one loan. The result is a single monthly payment instead of multiple payments. Use a loan consolidation calculator to find out if this is a good option for you.
WHAT IS A DEBT MANAGEMENT PLAN?
Organizations that advertise credit counseling often arrange for consumers to pay debts through a debt management plan (DMP). In a DMP, you deposit money each month with a credit counseling organization. The organization uses these deposits to pay your credit card bills, student loans, medical bills, or other unsecured debts according to a payment schedule they’ve worked out with you and your creditors. Creditors may agree to lower interest rates or waive certain fees if you are repaying through a DMP. Some organizations that offer DMPs have deceived and defrauded consumers. If you are paying through a DMP, contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the organization handling your DMP.
WHERE CAN I GET HELP WITH DEBTS I CANT AFFORD TO PAY?
In most communities, there are agencies that can help you manage your debts. The most helpful and most widely available are non-profit Consumer Credit Counseling Services (CCCS). CCCS counselors can work with you privately to help you develop a budget, figure out your options, and negotiate with creditors to repay your debts. Call 1-800-388-2227 to locate the office nearest you.
If your debts are too large, you may want to consider bankruptcy. Bankruptcy can give you a fresh start, but it is a serious step that can make it harder to get credit for years after you declare bankruptcy. Call your local Legal Aid or Legal Services office for advice. If you don’t qualify for their services, ask them for a referral to a bankruptcy attorney
FDIC MODEL SAFE ACCOUNTS TEMPLATE
The FDIC Model Safe Accounts Template provides insured institutions with guidelines for offering cost-effective accounts that are safe and affordable for consumers. The accounts reflect the following guiding principles: transparent and reasonable rates and fees and access to banking services that are FDIC insured.
FREQUENTLY ASKED CREDIT QUESTIONS
Do Missed Payments Affect My Score?
How many payments you miss, if you don’t pay the debt at all, and how long ago late payments occurred are all important. The further in the past a late payment occurred, the less impact it will have on credit scores and lending decisions. That is why it is important to catch up on your payments if you have fallen behind.
How Can I Get Credit if I Can’t Open a Credit Account?
If you cannot get a credit account through a bank or credit union, you may need a friend or family member to cosign for you or add you as an authorized user on an existing account.
Will Closing Accounts Raise My Credit Score?
Be cautious about closing accounts. Doing so will reduce your available credit limits and will increase your overall utilization rate, making it appear as if you have suddenly taken on more debt. The result is a temporary negative impact on your credit scores.
Will Applying for New Accounts Raise My Credit Score?
Each time you apply for credit an inquiry is added to your credit report. Inquiries are a record that a lender has reviewed your credit report in response to your application for credit. They indicate that you may have new debt that is not yet shown as an account in your credit report, and so represent an unknown risk to lenders. For that reason, recent inquiries can have a small but meaningful impact on credit scores. However, that impact is temporary.
How does Shopping for a Car or Home Affect My Score?
Inquiries for auto purchases and mortgage loans are unique. Because lenders recognize you will shop for the best auto and mortgage loan rates, inquiries for those types of loans in a short period are counted as a single inquiry by credit scoring systems. Doing so enables you to find the best rates with little or no impact on your credit scores.
What is the First Step to Rebuild My Credit Score?
The first step in rebuilding strong credit scores after having credit problems is to bring your accounts current by paying any remaining past-due payments. Before your credit scores will improve significantly, however, you must show that you have regained control of your credit by making on-time payments over time. The more serious your past credit difficulties, the longer it will take to rebuild a positive credit history and strong credit scores.
Consumer Federation of America’s Vantage Credit Score Website
Financial Industry Regulatory Authority (FINRA) website
My Fico, About Credit Scores
Money Under 30, Understanding “Your Number”
Bankrate, Credit Scores Explained
U.S. General Services Administration, Federal Citizen Information Center and Fair Isaac Corporation (2008)
Federal Trade Commission’s, Facts for Consumers (2011)