For some entering the housing market, the notion of facing the facts on a credit report inspires more fear than anticipation.
The truth is, according to lenders, that an individual’s or couple’s credit history is still the basis on which home loans are based. But establishing and maintaining good credit may be a different process for this generation of home buyers than it was for their parents.
“It is exactly as your mother told you,” said Linda Youngs of Infinity Mortgage. “Good credit is everything. The difference is knowing how to build a credit history.”
For generations, creating and maintaining good credit meant being — and staying — debt-free. And in the past, that often amounted to paying cash for everything from groceries to rent. These days, though, it is necessary to demonstrate healthy money management by paying bills on time and creating a paper trail to prove it.
“Often, young people find themselves in trouble because they feel they’re not disciplined enough to handle a checking account and they’ve been paying their bills in cash,” Youngs said. “But they’ve got to get that money out of the mattress and into the bank to create a paper trail.”
The trail is necessary, Youngs says, because lenders look for consistency in meeting financial obligations over time. And while they do peruse the big picture — credit card payments, payments on other installment loans and a record of savings accounts and investments — they pay special attention to demonstrated ability to pay rent and previous mortgages in a consistently timely manner.
“Items like utility bills don’t show up on credit reports,” Youngs said. “But if you had a mortgage, did you pay it on time? If you paid rent, were you always on time? That’s what lenders look at.”
But a less-than-perfect credit report may not preclude potential buyers from getting that mortgage. Even someone who has been involved in a foreclosure of bankruptcy may qualify for a loan within three years if they show they’ve been paying their bills on time and consistently.
So why worry if the rent has been late a couple of times and the balance on the credit card is 30 days overdue? The bottom line is that good credit pays.
“Interest rates vary,” Youngs said. “And the rate depends upon a buyer’s credit rating. Someone with perfect credit will get the lower rate. It’s as simple as that.”