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When you apply for a mortgage to finance your home purchase, one of the first things your lender will likely do is to check your three credit reports and scores. The condition of your credit will determine both the interest rate you are charged on your home loan and whether or not you can qualify for financing in the first place. Don’t miss these other common mistakes people make when buying their first home, too.
Although it would be nice to believe that the information on your credit reports is always correct (it’s pretty important information, after all), you can’t take that for granted. You have to check for yourself; the credit bureaus aren’t perfect and they’re known to make mistakes. In fact, the Federal Trade Commission released a study which found that 26 percent of participants found a “material” error on their credit reports, aka an error which made them seem riskier to lenders.
Lance Cothern, personal finance expert and founder of MoneyManifesto.com, agrees that checking your credit reports for errors before you apply for a mortgage is a must. “Credit bureaus report what is submitted to them on your credit reports. Unfortunately, not everything submitted is always accurate,” Cothern explains. “Your credit scores are directly generated from information on these reports. That means an incorrect negative collection item from a past cable company or a medical bill that you were never notified of could result in a lower credit score.”
Incorrect information on your credit reports isn’t just annoying. It could cost you greatly the next time you apply for major financing, like a mortgage. “Incorrect negative credit information could lead to a higher interest rate on your mortgage. This could end up costing you thousands of dollars in extra interest,” says Cothern. Check out the other surprising costs every first-time home buyer should know about.
The good news is you can check your credit reports in advance of any pending applications, perhaps free of charge. The federal government gives you the right to access a free copy of all three of your credit reports once every 12 months via AnnualCreditReport.com.
Once you have downloaded your reports, check them carefully for errors. The Fair Credit Reporting Act gives you the right to dispute any inaccurate or questionable information you discover on your credit reports. Next, find out the 10-step plan for buying your first home.