Back stateside after a decade of deployments in the Middle East, a 37-year-old U.S. Army mechanic vowed to buy a house of his own. An off-road vehicle enthusiast, he was keen on acquiring a place with a double garage and recently found a split-level to his liking.
But knowing he’d face competition from other bidders in the suburb where he wished to live, the mechanic made sure to submit his strongest possible offer -- one to convince the sellers he could definitely go through with the deal.
“There were four other bidders, including one offering the owners more money. But our buyer still beat out all the others. He was extremely happy to win because the house was in immaculate condition,” says Richard Harty, the real estate broker who represented the mechanic.
How did this first-time buyer prevail? He took Harty’s advice and met in person with a local lender to ensure he had a strong and personalized letter of mortgage pre-approval to attach to his offer.
“The letter practically guaranteed that this mechanic had the financial assets and credit history to make it to the closing table,” Harty says.
Real estate specialists say this summer’s frenzied seller’s market is now becoming slightly more balanced to the benefit of buyers. But they caution that buyers seeking a home in a popular neighborhood can still expect to face multiple bidding situations through 2022.
“Strategic buyers know that to compete they must have their financial ducks in a row. That absolutely means getting mortgage preapproval and having the highest possible credit score,” says Harty, president of the National Association of Exclusive Buyer Agents, (naeba.org).
The mechanic in this true story had an almost flawless credit history, not to mention employment continuity and a healthy down payment. But many other prospective buyers need more time to strengthen their financial status.
Here are a few pointers for first-time buyers:
-- Inform yourself about credit.
“Because you can’t learn this stuff by osmosis, you have to educate yourself about credit,” says Keith Gumbinger, a vice president at HSH Associates (hsh.com), which tracks mortgage markets across the country.
As he notes, nearly all U.S. adults are assigned a three-digit number associated with their credit histories: the increasingly influential “credit score.” Yet few consumers know their scores or how to improve them.
To learn more about credit -- and how to correct errors -- Gumbinger suggests you visit the website of the Federal Trade Commission (ftc.gov) or find a book on the topic. One he recommends is “Your Credit Score,” by Liz Weston.
“Ideally, you’ll start reading and educating yourself a few months before you go for a mortgage, or even sooner if you know you have credit issues,” Gumbinger says.
-- Research your credit standing.
Under federal law, you're entitled to free credit reports from the three largest credit bureaus: Equifax, Experian and TransUnion. You can easily request these online at annualcreditreport.com.
Besides your credit reports, you'll want to access your credit scores. Such scores, which draw on data from the credit bureaus, seek to provide lenders with a quantitative measure of a person's credit risk. Most lenders still use FICO scores, pioneered by the Fair Isaac Corp.
In most cases, you'll need to pay a fee to obtain your credit scores. One way to get them is through the Fair Isaac website: myfico.com. You can also receive credit scores through the three large credit bureaus. FICO scores range from 300 to 850 and the higher the score, the more likely you are to get the best available rate on your mortgage.
Once you’ve chosen a property you want to buy, it's time to begin the process of comparison shopping on mortgage rates.
You may wish to start the rate-shopping process with the lender who tutored you in the basics of home finance. But Gumbinger strongly suggests you extend your rate hunt well beyond the first lender you consulted. And he recommends you include community banks and credit unions in your search.
-- Realize that your credit scores can be improved over time.
Harty encourages his home-buying clients to safeguard their credit status in advance of buying a property.
“At least until your mortgage is finally approved, you need to tie up any loose ends in your financial history. Ideally, you’ll pay down an outstanding debt, such as a credit card or auto loan. You will resist taking out any new credit lines and you’ll maintain your job status,” he says.
Credit experts say consumers should avoid closing unused credit accounts, which can cause their scores to sag. Likewise, it’s a mistake to consolidate credit card debt on one or two cards, because a concentration of high balances can adversely affect a credit score. Consumers who “max out” their credit cards or other revolving credit lines are treated unkindly by the Fair Isaac scoring formula.
-- Seek to correct errors found on your credit report.
A recent investigation by Consumer Reports (involving 6,000 consumers) found that more than one-third had errors on their credit reports, leading in many cases to excessively high interest charges.
Some errors can be corrected with enough phone calls and patience. However, as Weston says, some credit problems, such as identity theft, can prove so horrendous that you could need an attorney to help straighten them out. One possible source for legal help: The National Association of Consumer Advocates (consumeradvocates.org).
(To contact Ellen James Martin, email her at firstname.lastname@example.org.)