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Credit Myths for First-Time Homebuyers

Get Clarity Before Approaching the Ownership Prequalification and Loan Preapproval Process

Before first-time homebuyers pull the trigger on buying a new home, they should understand some common myths in the credit reporting industry. As your agent, we're prepared to clear up those myths and explain how they might affect our first-time homebuyers during the ownership prequalification and loan preapproval process.

Here are a few of them:

1

"Closing an old account will help my credit"

This might be one of the most common misconceptions around how unused accounts, like credit cards, can impact creditworthiness. One of the main factors that lenders look at when reviewing credit history is how long accounts have been open.

They typically average all current and past accounts to get an average length of time. The longer the credit history, the better. By closing an old account, you are effectively reducing the impact that individual account may have on your overall credit history. Instead of closing the account, keep it open. 

2

All debt is treated equally

Since all debt carries a monetary value, it might make sense that all debt is the same. However, this is not the case.

Lenders look at the specific type of debt to better understand the risk associated with it. Short-term accounts, like credit or charge cards, are considered more risky if the account has a high amount of revolving debt. This is due, in part, to the requirement that credit cards be paid off monthly.

In contrast, a 30-year mortgage is understood to be a long-term debt and is treated as such. Therefore, just because you have a car loan with a high balance remaining, does not mean that it will hurt your credit as much as a credit card that is maxed out.

It's recommended that high balanced credit card debt be paid down below fifty percent of the maximum credit limit amount or even better paid off entirely. Doing so will improve your credit position. 

3

"Credit repair companies can help improve my credit"

The old adage of “if something is too good to be true, it probably is” couldn’t be more accurate in this example. Today's younger generations have become increasingly interested in getting help establishing or repairing their credit.

Companies such as Credit Karma, Credit Sesame, and even the three major credit reporting companies such as Equifax, Experian and TransUnion offer ways to improve or “boost” credit. However, BUYER BEWARE. These companies can only assist you with creating a plan to pay down or consolidate debt. They cannot magically make or reduce the amount of debt a person has — this can only be done by paying off an account.

Instead of paying a company to put this plan together, homebuyers can create a spreadsheet with their recurring expenses along with their monthly income to visualize what debts can be paid down over a period of time. For example, there is a non-mortgage debt elimination method called "debt snowball". The debt snowball method is a debt reduction strategy where you pay off debt in the order of smallest to largest, gaining momentum as you eliminate each balance. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance. It's an effective plan that really works. Contact Wagner Real Estate to get example spreadsheet.

4

"Paying off a collection or debt removes it from my credit report"

Undeniably false. In fact, a derogatory mark like a collection or missed payment can stay on your credit report for up to seven years. While paying this off will stop future attempts by the collection agency or banking institution to collect on the debt, there is no way to remove a derogatory mark from your credit report unless it was reported incorrectly due to fraud or identity theft.

5

"My relationship status or divorce is reflected on my credit report"

Information like income, employment and relationship status are not reported to credit bureaus. Questions regarding this information will likely be asked during the credit application process in conjunction with your credit score. However, they will not show up on a credit report. This is important for those going through a separation. If one partner does not pay a debt and the other partner is on the account, it will negatively impact both parties.

Now that some of these misconceptions have been put to rest, as a homebuyer you should be ready to speak to your lender about getting preapproved for a home loan. In today’s market, lenders can even help formulate a plan to help homebuyers pay down debt to be approved for a better interest rate.  

Wagner Real Estate is a great resource homebuyers can turn to while going through the initial stages of the homebuying process. Our vast knowledge and years of experience are unparalleled in the industry.

Contacts

info@merlinwagner.com
Direct: +1 760 473 1210