Originally published on Inman News, we take a look at some common myths First-Time Homebuyers need to know below.
As interest rates continue to drop to historic lows – fueled by the ongoing COVID-19 pandemic – an uptick in mortgage applications has flooded the financial community. The Mortgage Bankers Association (MBA) reported an 8.0% increase in mortgage loan application volume for the week ending June 12, 2020. Before first-time homebuyers pull the trigger on buying a new home, they should understand some common myths in the credit reporting industry and how these might affect them during the pre-qualification and pre-approval process.
- 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 your creditworthiness. One of the main factors that lenders look at when reviewing your 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 your 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.
- 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/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.
- Credit Repair Companies Can Help Improve My Credit – The old adage “if something is too good to be true, it probably is” couldn’t be more accurate in this example. Younger generations have become increasingly interested in getting help establishing or repairing their credit. Companies like Credit Karma, Credit Sesame, and even the major three credit reporting companies: Equifax, Experian, and TransUnion offer ways to improve or “boost” your 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 create this plan for you, create a spreadsheet with your recurring expenses along with your monthly income to visualize what debts can be paid down over a period of time.
- 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.
- 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 your 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, you should be ready to speak to your lender about getting pre-approved for a home loan. In today’s market, your lender can even help formulate a plan to help you pay down debt in order to be approved for a better interest rate. Your real estate agent is also another great resource to utilize while going through the initial stages of the home-buying process. Their vast knowledge and years of experience are unparalleled in the industry. Happy House-Hunting!