Thinking About a New Home? Start with a Credit Appraisal

This blog is also featured in The Huffington Post.

Dreaming of purchasing a new home in the next several months? Whether you are a first time home buyer, upgrading to a newer or bigger home, or downsizing into a smaller residence, the first thing that you should do is have your credit appraised.

Today’s real estate market is one that should only be entered into as an educated and fully prepared buyer. Demand is high in today’s market, and available home inventory is low. If you are not educated and well-prepared to make a firm offer, your offer will get less consideration from a seller than an offer from a customer who is ready to proceed to closing.

Can you imagine the anguish of finding the perfect home for you and your family, at the perfect price, only to discover that there is a credit problem that will keep you from securing a mortgage on that home? Credit issues often take time to resolve – weeks, if not months – could pass before you can successfully resolve your credit problems. Chances are, the perfect house with the perfect price is going to be sold to another buyer in today’s market.

How do you avoid that sort of disappointment? It’s simple, start with a credit appraisal! A credit appraisal is a thorough, detailed review of your credit history by an individual with expertise in reviewing credit reports, as well as detailed knowledge of mortgage underwriting standards.

An appraisal is just not about your credit score. You can have a high credit score (even in the 700s), but still have items on your credit report that will block you from being approved for a mortgage. We see these type of challenges at our credit restoration company regularly.

It is vitally important that your appraisal include credit history and a credit score from each of the three prominent credit reporting agencies (Transunion, Equifax and Experian). Mortgage providers look closely at the reports from all three of these agencies, and frequently accounts that are reported by one bureau aren’t being reported by the other two. If a derogatory item shows up on even just one of the reports, it is likely going to be an obstacle in your mortgage pursuit.

Credit history, alone, like the one you are able to obtain for free once a year is not enough. It is also essential that you have scores from all three bureaus reviewed.

It is imperative that these three scores are FICO mortgage scores. Believe it or not, there are all sorts of different credit scores out there today, and not all of them are the type of scores that are used to determine your eligibility for a mortgage. FICO (an acronym for Fair Isaac and Company, who now simply call themselves “Fair Isaac”) is a scoring model, or mathematical algorithm, that is purchased by credit bureaus and used to compute your mortgage credit score.

That score that you get for free, on your credit card statement or from online credit monitoring services? More than likely, it is not a FICO mortgage score. Other credit score models used by those companies can be as much as sixty points different from your real FICO score (we see it all the time).

Why does an accurate credit appraisal require all three scores? Mortgage companies use something called your middle score. I wrote about it in detail, here: The Shamrock and Your Credit Score, a few months ago. In short, your middle score is not an average of your three scores, and it’s not even the median of those scores. Mortgage companies and banks “throw out” your high score and your low score – sort of like how Olympic diving and ice skating are scored. They look solely at the middle of your three scores to determine whether you meet the credit score portion of their underwriting standards.

Even if your appraisal indicates that your credit score is high enough to qualify for an entry level loan (like an FHA loan) you may have the time and the opportunity to strengthen your score to a point where more favorable loan products might become available to you. Your time will be well spent building your credit score while you shop for your new home.

Once you have had your credit appraised and certified as credit qualified, you are “Real Estate Ready.” It’s time to take the next step and proceed to your bank or mortgage company for pre-approval.

Not to be confused with a pre-qualification, which is essentially a “rough” calculation of how much of a loan you might qualify for, a pre-approval is a written estimate from a lender stating how much you will likely be able to borrow based on your (now certified) credit and other financial information (like your earnings history.)

The application for a loan pre-approval often requires submitting pay stubs, bank statements, tax returns and other financial documents. Most lenders charge nothing for the application, since they are hoping to win your business, but some charge you (usually less than $100.00) to cover the cost of a credit check.

A credit appraisal will not only spare you from disappointment, it will also save you time. Why spend your valuable time with a realtor or lender, only to be told that your credit doesn’t qualify you to buy a home. With a certified credit appraisal the question, more often than not, changes from “Will I qualify for a loan?” to “How big of a loan will I qualify for?”

Get your credit appraised today. Knowing that you are “Real Estate Ready” and being certified accordingly, will provide you with significant leverage when you are ready to make an offer on a home. It provides assurance to the seller that you will be able to secure financing and makes your offer significantly more attractive than an offer that is contingent upon financing being secured.