Before you even think about applying for a mortgage in the Bay Area, you need to know your credit score and what appears on your credit report. Lenders will use this to determine not only if you qualify for a loan, but also what rate and terms you will qualify for. Many states have passed legislation to give consumers the right to a free credit report, and federal law allows you to obtain one free copy of your report every 12 months.
You can obtain your free credit reports once every 12 months with no risk by visiting www.AnnualCreditReport.com. Make sure you type this address into your browser properly, as there are many websites who try to trick consumers into paying for their credit report using similar names or web addresses.
Be Suspicious of Credit Report Companies that Charge
Do not provide your personal information to any suspicious company that charges you to obtain your credit report. You may end up disclosing your Social Security number to cyber criminals.
Also be on the look-out for any company that pitches you a free report and then asks for credit card information. You will end up signing up for services you do not want that will be billed to your credit card each month.
Your FICO Score
FICO scores were developed in the 1980s by Fair Isaac Corporation and are now widely used by lenders to evaluate risk and creditworthiness of loan applicants. FICO scores range from 300 (very bad) to 850 (the best). Very few consumers are at the extreme ends of this range. You can learn your FICO score online for a fee, and receive your credit report and scores from the three main credit bureaus: TransUnion, Equifax and Experian.
Lenders often use the middle score in evaluating your application. If you want to pay for your FICO score, make sure you are obtaining a genuine FICO score, as each credit bureau has developed its own scoring model:
- Equifax uses Beacon
- Experian uses Experian or Fair Isaac Risk Model
- TransUnion uses Empirica
Avoid anything else.
Keep in mind that the FICO score you order in the Bay Area and the score your lender receives will probably be different, but they should not vary too much.
VantageScore is a FICO competitor that uses a different way to analyze consumer information. Your VantageScore will assign you a letter grade and was created by all three credit bureaus. Here is how scores are rated:
A (901-990) D (601-700)
B (801-900) F (501-600)
The VantageScore model includes features not found in the FICO model, including a 24-month review of credit history. Scoring tends to favor consumers who have had prior negative marks on their credit file with good recent history over the last two years.
Improve Your Credit Before Buying
Before buying a home in the Bay Area, it is a good idea to do what you can to improve your credit score. Even a small difference of a few digits can end up saving you thousands in interest over the life of your loan by qualifying you for better terms and rates.
A FICO score below 620 will probably bar you from qualifying for a mortgage, while a score of 740 or more will likely garner you the best rates possible.
Even if you know you qualify, it pays to boost your score before getting a loan. Possible ways to improve your credit include:
- Paying down credit card balances
- Contacting the bureaus to remove incorrect information
- Asking creditors to remove late payments from your file
- Settling unpaid debts
- NOT closing unused accounts (as this harms your utilization ratio)