Is Ignoring Credit Reports a Big Mortgage Mistake?

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Purchasing a new home can be a time-consuming process. Prospective homebuyers frequently have to conduct lengthy searches online and in classified ads, set up schedules to look at potential homes, and weigh a number of factors, such as the crime rate, school system, and property taxes in the area surrounding the property.

Despite the diligence needed in the home-buying process, more Americans bought homes in December 2010 than in the previous month, according to a recent report from the National Association of Realtors (NAR).

Existing-home sales on single-family homes, townhouses, and condominiums rose 12.3 percent during the month, with purchases rising more than 10 percent in virtually every area of the country.

"Historically-low mortgage interest rates, stable home prices, and pent-up demand are drawing homebuyers into the market," said NAR president Ron Phipps, broker-president of Phipps Realty. "Recent homebuyers have been successful with very low default rates, given the outstanding performance for loans originated in 2009 and 2010."

Potential homebuyers who have a firm understanding of their financial standing before seeking a loan have a greater chance of receiving the best available rate. Consumers can gain this understanding by taking stock of their current expenditures and reviewing their budgets to help them decide what type of monthly payment they can afford.

Consumers may also want to check their credit reports and scores, since not knowing one's credit score prior to applying for a loan was listed as the number-one mortgage mistake a homebuyer can make in a recent U.S. News and World Report post.

Understanding one's credit history and knowing one's credit scores can help consumers better search for lower interest rates and other money-saving deals prior to starting the application process.

While a difference of a few percentage points may not seem like a lot, a higher interest rate can add thousands of dollars to a homebuyer's mortgage payments over the life of a traditional 30-year loan. With the money saved by a lower interest rate, a homeowner could make larger payments toward other outstanding balances, such as a credit card or car loan -- or renovate the home and increase its sales value down the road.

In addition, by understanding what kind of loans they can qualify for, consumers will be better able to find the best offer that fits their price range.

The U.S. News and World Report piece advises against applying for a new credit card or loan alongside a mortgage. Every time a financial institution checks a consumer's credit report, it gets listed in the consumer's credit file as a hard inquiry. Consumers who have too many inquiries could be viewed as in need of additional funds, which increases their risk in the eyes of lenders, who may not know why other companies are checking the person's credit report.

Consumers could also benefit from looking at the total cost of a home, the news source says. The full cost of owning a home includes not only the principal and interest payments, but also taxes and home insurance. Those who fail to take these added bills into account run the risk of purchasing a home they may not be able to afford.

By buying more than they can afford, these consumers may also be at an increased risk for defaulting on their payments. Homeowners who make infrequent payments or stop paying their bills altogether often receive black marks on their credit, which can make it much more difficult to refinance a loan in the future.


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