What Makes Up Your Credit Score

Understanding Your Credit Report

Get ready: Your credit report may go on for literally literally pages and pages. Focus on making sure the most critical information is mistake-free, particularly these bits of data: pages and pages. Focus on making sure the most critical information is mistake-free, particularly these bits of data: * Name, Social Security Number, and addresses. Name, Social Security Number, and addresses. Especially if your name is a common one, you may have multiple aliases. And an address you don't recognize may mean someone with the same name is incorrectly listed on your report. Especially if your name is a common one, you may have multiple aliases. And an address you don't recognize may mean someone with the same name is incorrectly listed on your report.* Creditors. Creditors. Make sure you actually borrowed money from the creditors that appear, and that the amounts borrowed are accurate. Keep in mind that some types of loans, like student loans, can be sold or transferred. In that case, all creditors that have held the loan will appear, but the pre-transferred or sold accounts should no longer be designated "open." Make sure you actually borrowed money from the creditors that appear, and that the amounts borrowed are accurate. Keep in mind that some types of loans, like student loans, can be sold or transferred. In that case, all creditors that have held the loan will appear, but the pre-transferred or sold accounts should no longer be designated "open."* Open credit lines. Open credit lines. Make sure any lines of credit you've closed are no longer shown as open. Different reporting companies use different terminology, so if you're not sure, call to clarify. Make sure any lines of credit you've closed are no longer shown as open. Different reporting companies use different terminology, so if you're not sure, call to clarify.* Collections and judgments. Collections and judgments. Make sure any collections actions or judgments are reflected accurately. Make sure any collections actions or judgments are reflected accurately.* Late payments. Late payments. These notations will usually indicate a late payment of 30, 60, or 90 days. Make sure they're accurate. These notations will usually indicate a late payment of 30, 60, or 90 days. Make sure they're accurate.

Correcting Credit Errors

Credit reporting mistakes happen frequently. Inaccuracies in the report affect your score, and if your score drops, so does the likelihood of you getting the best possible loan. You'll want to spot and correct any errors before a lender sees your report, not after you've applied for a loan and been rejected.

All manner of mistakes are possible-from bits of credit history that aren't yours to a false claim that you paid a bill late. To correct such errors, contact the reporting agency in writing. If all three agencies misreported the information, you'll have to contact all three. Each agency may have a different procedure and forms to use for disputing the report. When you discuss issues over the phone, make sure to document conversations, including the date and name of the person you spoke with. Finally, if you have any documentation that supports your claim, send a copy with an explanatory cover letter.

The credit reporting agency has 30 days to investigate your complaint and give you its findings. If it can't verify that its version of events is correct, the agency is supposed to remove the information from your file. If it won't, you have the right to place a statement in your file giving your version of what happened.

Sometimes you can also work directly with your current and former creditors to correct inaccuracies or solve problems. If you're willing to pay the disputed amount, or the creditor is willing to settle for a lesser amount-which it sometimes is-the creditor may also agree to clear the item from your credit history. Likewise if you have proof of an error, it may be faster to go directly through the creditor than to correct it through the reporting bureau.

CHECK IT OUT.

Need help patching up your credit? See See Credit Repair Credit Repair, by Robin Leonard and John Lamb (Nolo). It offers plain-English explanations and over 30 forms and letters to help you negotiate with creditors, get positive information added to your credit record, and build a financial cushion.

Repairing Your Credit

Rome wasn't built in a day, and credit history can't be repaired in one, either. If you or a coborrower have a poor credit history, Fair Isaac suggests you start cleaning it up six to 12 months before applying for a loan. If your credit history is really messy, it may take even longer.

But here's some good news: Even if you have a long, ugly credit history, your score will be weighted in favor of your latest performance. Turn over a new leaf by following these strategies: * Pay on time from now on. Pay on time from now on. Don't miss due dates for credit cards and other bills. Setting up automatic payment plans can help, and your lender may reduce your interest rate in return. Don't miss due dates for credit cards and other bills. Setting up automatic payment plans can help, and your lender may reduce your interest rate in return.* Pay the worst first. Pay the worst first. Start by paying off high-interest debt, like on credit cards. Also, keep your balances low on revolving lines of credit. Don't just move the debt around-that won't fool the credit scorers, nor will it free up cash for a mortgage payment. Start by paying off high-interest debt, like on credit cards. Also, keep your balances low on revolving lines of credit. Don't just move the debt around-that won't fool the credit scorers, nor will it free up cash for a mortgage payment.

TIP.

Check out FHA loans. Some low down payment federal loans are less strict about credit background. See Chapter 7 for details. Some low down payment federal loans are less strict about credit background. See Chapter 7 for details.

What's Your Monthly Budget? Understanding Your Finances

Now that you've seen what lenders look at to decide how much you can spend, it's time to think about what you you believe you can spend. The point is to avoid taking on so much debt that you lose sleep or have to give up sushi for ramen noodles. believe you can spend. The point is to avoid taking on so much debt that you lose sleep or have to give up sushi for ramen noodles.

In fact, if you look closer at that debt-to-income ratio, you'll realize that it has a built-in problem. It's based on your gross gross income-the amount you theoretically make before your paycheck gets eaten by taxes and other withdrawals. Your mortgage payment could end up being at least half of what you actually take home. Depending on your lifestyle, spending that much on a house might sound either just fine or ridiculously impossible. income-the amount you theoretically make before your paycheck gets eaten by taxes and other withdrawals. Your mortgage payment could end up being at least half of what you actually take home. Depending on your lifestyle, spending that much on a house might sound either just fine or ridiculously impossible.

The easiest way to understand your current spending and savings pattern is to do a budget worksheet. You can do this using either special budgeting software, a spreadsheet like Excel, or the good old-fashioned way, with a pencil and paper. List all your expenses, including food, entertainment, clothing, transportation and car-related expenses, health and dental care, child and pet care, student loans, and utilities. Hold onto your receipts, and if you use an ATM card or make electronic payments, look at your bank statement to see where it's all going each month. Include automatic monthly withdrawals on your budget worksheet-for your DSL line, online DVD rentals, or gym membership. Of course, you can leave your current rent and any rental-related expenses out of your calculations.

CHECK IT OUT.

These websites have free budget worksheets you can print and fill out, or budgeting software to purchase: * * www.vertex42.com * * www.planabudget.com * * www.quicken.com.

Next, compare your monthly expense total to your monthly net income-what comes home, not what you make before taxes and the rest. The difference between that take-home pay and your expenses is the amount of disposable income that you can use for new house-related expenses.From paperclip to house Kyle McDonald set himself a challenge: to trade his way from a red paperclip to a house. He succeeded by bartering on Craigslist, working his way up through a pen, a doorknob, and a camp stove. It took McDonald only 14 trades (one with actor Corbin Bernsen) and about one year to reach his goal of homeownership. (He's now ready to trade the house, too.)Read his story at www.oneredpaperclip.com.

Most people try to modify their spending habits if their disposable income isn't enough to cover the PITI. Having all your expenses in front of you helps you decide where to make such cuts. It also prepares you to draw the line if a lender or mortgage broker encourages you to pay more than your true budget allows. Remember, the lender mainly cares that you can pay back the money you borrow-not that you do it while living the life you want. If Pilates classes or Friday happy hours are important to you, then stick by your own budget and plan.

Getting Creative: Tips for Overcoming Financial Roadblocks

After running the numbers, you may feel that you can't afford a decent house, or maybe any house. But no matter your financial woes, there are steps you can take to ease them, including: * * Reduce your debt. Reduce your debt. This will free up cash for monthly house payments and reduce your debt-to-income ratio. This will free up cash for monthly house payments and reduce your debt-to-income ratio.* Make a new budget. Make a new budget. Revise your monthly budget, keeping your homebuying goals in mind. If you have targets, you're more likely to control your spending habits to meet them. Revise your monthly budget, keeping your homebuying goals in mind. If you have targets, you're more likely to control your spending habits to meet them.* Reduce spending. Reduce spending. You may be able to get a roommate until you're ready to buy a place, apply an expected work bonus toward your fund, go back to basic cable, or shop more at thrift shops. Check out local freecycle groups ( You may be able to get a roommate until you're ready to buy a place, apply an expected work bonus toward your fund, go back to basic cable, or shop more at thrift shops. Check out local freecycle groups (www.freecycle.org) for free items.* Consider different financing strategies. Consider different financing strategies. Check out low- or no-down payment loans or the variety of adjustable rate mortgages with low initial payments (covered in Chapter 6). Check out low- or no-down payment loans or the variety of adjustable rate mortgages with low initial payments (covered in Chapter 6).* Borrow from a nontraditional source. Borrow from a nontraditional source. Consider different and creative options for borrowing money, from your family to the seller of the house you buy. For details, see Chapter 7. Consider different and creative options for borrowing money, from your family to the seller of the house you buy. For details, see Chapter 7.* Get a buying partner. Get a buying partner. Perhaps you know someone who has cash and would be interested in jointly owning a property. Keep in mind that owning together doesn't have to mean living together, or even owning equal shares. Perhaps you know someone who has cash and would be interested in jointly owning a property. Keep in mind that owning together doesn't have to mean living together, or even owning equal shares.* Cash out other investments. Cash out other investments. Consider cashing out money invested in stocks, bonds, mutual funds, or other property to come up with a down payment, thus also reducing your monthly payment. Consider cashing out money invested in stocks, bonds, mutual funds, or other property to come up with a down payment, thus also reducing your monthly payment.* Consider other home types, sizes, conditions, or locations. Consider other home types, sizes, conditions, or locations. Remember that condominiums are often cheaper than houses and old houses generally cheaper than new. Remember that condominiums are often cheaper than houses and old houses generally cheaper than new.* Wait. Wait. If you expect prices and interest rates to remain stable, your income to increase, and to save more money, you might delay your house purchase. With increased income, you may be able to borrow more; with an increased down payment, you may not need more. If you expect prices and interest rates to remain stable, your income to increase, and to save more money, you might delay your house purchase. With increased income, you may be able to borrow more; with an increased down payment, you may not need more.

The Power of Paper: Getting Preapproved for a Loan

Knowing what house-related costs will be laid at your feet, roughly how much a lender will let you borrow, and how much you'll really want to spend based on your income, lifestyle, and other factors, you can think about getting preapproved preapproved for a loan. Preapproval means you get a letter from a bank or lender committing to lend you a certain amount. It's often expressed as a monthly amount, because interest rates may vary, but the amount you can afford to pay each month does not. for a loan. Preapproval means you get a letter from a bank or lender committing to lend you a certain amount. It's often expressed as a monthly amount, because interest rates may vary, but the amount you can afford to pay each month does not.

Preapproval does two important things: It gives you some certainty that you can afford the houses you're considering, and it makes you more attractive to sellers. You'll know exactly how much you can borrow, and sellers will know that if you've put an offer on their place, you can actually come through with the cash.

TIP.

You don't need to use the lender that preapproves you. It would make matters easier if you did, but there's no need to feel bound. You (or your mortgage broker) might find a better deal by the time you've chosen a house. It would make matters easier if you did, but there's no need to feel bound. You (or your mortgage broker) might find a better deal by the time you've chosen a house.

Why Preapproval Is Better Than Prequalification

You may have heard of loan prequalification prequalification, but don't get it confused with preapproval. When you get prequalified, you give a lender some basic information about your income and debts, and the lender estimates what you'll likely be able to borrow. But the lender doesn't commit to lending you that money, so prequalification mainly helps you ballpark the price range you should be looking at and readjust your expectations if need be. Prequalification certainly won't wow any sellers. On the plus side, prequalification is free and easy to do (in person, over the phone, or on the Internet).

Preapproval is a different story. It will actually cost you a little money (in the $30-$40 range), because the lender will check your credit history. (This cost may be negotiable.) But preapproval will also give you more-a written commitment to lend you money. Don't accept a verbal preapproval.

Of course, the lender will attach a few conditions to that commitment. If, for example, you lose your job, the bargain is off. And make sure your preapproval letter doesn't contain too many conditions. For example, if the letter conditions the loan on a credit check, it means the lender hasn't really done its homework, and you're not really preapproved.

What You Need to Show for Preapproval

To get preapproved, you'll need to provide the lender with some financial data. This is actually a blessing in disguise-it's all stuff you'll need to dig up to get a loan anyway, and it's about the last thing you'll want to be thinking about later, when you've found a place to buy and are juggling other tasks.

Here's what you'll need to pull together and photocopy. If you're buying with someone else, both of you will need to give the lender every item on the list.

* pay stubs for the last 30 days* two years' tax returns and W-2s or business tax returns if you're self-employed* proof of other income* proof of other assets (such as stocks or pension funds)* three months of bank records for every account you have* source of your down payment* names, addresses, and phone numbers of employers for the last two years* names, addresses, and phone numbers of landlords for the last two years, and* information about your current debts, including account numbers, monthly payment amounts, and so on.

CD-ROM.

Use the "Financial Information for Lenders" checklist in the Homebuyer's Toolkit on the CD-ROM. It will help you keep track of everything you'll need for loan preapproval (and later, final loan approval). It will help you keep track of everything you'll need for loan preapproval (and later, final loan approval).

You'll also need to fill out an application-if you're working with a mortgage broker, you'll probably get help with it, and can draw much of the information straight from the documents listed above. The lender will ask you for additional information once you've selected a property-that is, if you use that lender. If you switch lenders, you'll have to give the new one the whole works. The additional material includes: * a property appraisal (you'll have to pay for that, usually about $300-$400 -the lender will set it up once you've selected a property), and* proof that you've obtained homeowners' insurance.

Where to Go for Preapproval

Your options for getting preapproved include working with a mortgage broker, going directly to a local bank or institutional lender, or using an Internet aggregator-a website that compiles loan information from a lot of different lenders into one place. For more on how to research mortgages, see Chapter 6.

If you haven't yet found a mortgage broker, there's no harm in going straight to a lender for preapproval. First, make sure the lender is willing to do two things: give you the up-front letter stating that you're preapproved up to a certain amount, and then give you another letter later, when you actually bid on a home. This second letter will reflect a preapproval amount equal to the amount you're offering to pay for the property. The second letter is important because when you give a preapproval to a seller, the seller doesn't need to know that you can afford to pay more. That kind of revelation can hurt your bargaining position.

Preapproval is usually a quick process. If documents are transmitted electronically, you could be preapproved within hours. At its longest, it should take only a few days.

What's Next?

Confident that you're not going to break your personal bank or end up without a home loan, you can now start checking out the housing market. We'll show you how in Chapter 4.

CHAPTER 4.

Stepping Out: What's on the Market and at What Price

Meet Your Adviser Bert Sperling, a city and neighborhood expert based in Portland, Oregon. Hes the founder of www.bestplaces.net and author of and author of Cities Ranked & Rated Cities Ranked & Rated (Wiley) and (Wiley) and The Best Places to Raise Your Family The Best Places to Raise Your Family (Wiley). (Wiley).

What he doesFor over 20 years, Bert has been helping people find their own best place to live, work, play, and retire. As the foremost creator of best-places studies, hes in constant contact with the national media and regularly publishes his latest findings. His creative yet useful research topics cover everything from the best cities for dating to the worst ones for migraine headaches.

First houseIt was a 1920s Craftsman bungalow in Portland, Oregon. My wife found the house and said, Were buying it-and she was absolutely right, it turned out to be a great place to raise our two sons. Affording it was a stretch, especially because interest rates were high. But we were tired of renting and were able to assume the sellers mortgage. We loved the neighborhood-only five minutes from downtown and close to shops, restaurants, and bus lines. Still, it had that neighborhood feeling-Im a big fan of urban neighborhoods.

Fantasy houseWeve already found it! Its a cedar-shingled, Northwest coastal style place we bought in Depot Bay, Oregon. The house is right on the rocks overlooking the ocean-a wonderful getaway, though ocean living is a bigger challenge than many people realize. Were under assault by the weather, with winds up to 100 miles per hour. One of our requirements was high-speed Internet service so we can stay at the beach house for extended time periods and I can keep up on my work.

Likes best about his workI tell people Ive got the best job in the world. Its wonderful to see all the differences in where people live and establish homes, and to be able to share their stories with others. I really believe theres no worst place to live. Every place is someones home and has things that mean a lot to them, even though other aspects of living there might be challenging.

Top tip for first-time homebuyersStart by figuring out what type of homebuyer you are. For example, are you a money is no object, because Ill live here forever; an I dont care about resale, I just want to find a good fit for my family; or an Ive got to find a fixer-upper if this is going to work type? Most of us have to watch how much we spend, so think about the long term, dont get in over your head, and dont buy the best place on the block.

V isualizing your perfect nest, and calculating what your budget will allow, was important. But now it's time to step out and see what the market really has to offer-before you turn into a serious house shopper, and possibly even before you find a real estate agent. Don't worry, this background work will take only a week or two. And it will be worth it, helping you to know when to leap at a house and what price to offer. You'll want to: isualizing your perfect nest, and calculating what your budget will allow, was important. But now it's time to step out and see what the market really has to offer-before you turn into a serious house shopper, and possibly even before you find a real estate agent. Don't worry, this background work will take only a week or two. And it will be worth it, helping you to know when to leap at a house and what price to offer. You'll want to: * get a feel for the communities where you might want to live (if you don't already know)* look at the houses already on the market, including houses in developments, still under construction* research the prices other sellers have recently paid for houses like the one you want, and* gauge whether the local market is kinder to buyers or to sellers.

TIP.

Eager to skip all this and just start shopping? It's possible to check out the market and keep your eye out for your dream house simultaneously-but it's harder. Without a sense of the market, you may waste your time, for example rushing to turn in a too-low bid in a hot market. Or you might waste your money, for example by bidding too high in a cool market. Give yourself time to explore. It's possible to check out the market and keep your eye out for your dream house simultaneously-but it's harder. Without a sense of the market, you may waste your time, for example rushing to turn in a too-low bid in a hot market. Or you might waste your money, for example by bidding too high in a cool market. Give yourself time to explore.