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Debunking credit myths for first-time home buyers

One of the most persistent myths out there is that you must pay back all of your existing debts before applying for a mortgage. Many successful home buyers have student debt, credit card debt or a car loan. (iStock)

Buying a home is a complicated process, even under the best circumstances. Between attending open houses, applying for loans and participating in negotiations, it’s a stressful undertaking.

To lower the strain, one key is to check your credit report early in the process. Credit reports are most always free, and available at www.annualcreditreport.com.

When you do check your credit, if there is something that looks suspicious, report it. If there is something that’s wrong, get it corrected with your lender/creditor or the credit bureau immediately. Lenders will use that information to calculate your credit score which could make or break your ability to secure a house loan.

For most people, buying a home is worth the effort — the right home can be life changing for an individual or family looking to start a new chapter. At the same time, a home purchase can help grow neighborhoods and communities, while allowing people to build wealth — the kind of intergenerational wealth that can bring purchasers security and equity for years to come.

Unfortunately, there are a lot of misconceptions about the home purchasing process, especially about how credit impacts first-time buyers. Those misconceptions can deter a prospective buyer or, conversely, prompt them to make a purchase they aren’t ready for.

Let’s address some of those myths:

Myth 1: Debt is bad for building credit.

One of the most persistent myths out there is that you must pay back all of your existing debts before applying for a mortgage. To put it simply, this just isn’t true. Many successful home buyers have student debt, credit card debt or a car loan.

A key part of the loan process is making sure that the ratio of debt to income and the payments you owe leave enough room for you to pay off a mortgage. Generally speaking, you shouldn’t have more than about 1/3 of your monthly income going to your debts, including your home.

You don’t have to pay everything off to buy a home — you just need to do your homework so you know what you can reasonably afford when looking for your home.

Myth 2: Your credit score and credit report are the same thing.

Your credit report is an unbiased, strictly factual, legally regulated rundown of all the debts you owe or have owed — everything from your student loans, to a car loan, to a debt that has been referred to a collections agency. It also shows how you’ve honored and paid down your debts.

Your credit score simplifies this information by running it through a credit model, arriving at a singular number that lenders use to assess creditworthiness. They are two different things, though the score is based on the report.

Myth 3: If you want to build your credit, you should engage a credit-repair company.

There are a number of factors that can contribute to a low credit score. If you’ve faced financial hardship and struggled to consistently pay down your debts, that negative information is probably on your credit report and bringing down your credit score. If you see incorrect information on your report, that could be dragging down your score, too. You can go to your lender or the credit bureaus and get that information removed, for free.

Accurate information, even if it’s negative, stays on the report (usually for seven years) — otherwise, it wouldn’t be an honest representation of your credit history. If you’re having problems with your credit and need help, credit counselors are out there to provide help. While most of them are nonprofit, they may charge a nominal fee to cover their costs.

But what you don’t need to do is engage a credit repair company that will promise that it can get accurate, if negative, information off of your report, and charge you a healthy monthly fee. This is often a scam designed to prey on vulnerable consumers — taking your money through false promises. You should avoid these at all costs.

Myth 4: Renting is bad for your credit.

Everyone strives to live in quality, dignified housing, whether rental or owned. You may have been taught that renting is a poor financial choice because you can’t build equity and will have nothing to show for it at the close of your lease. Renting doesn’t hurt your credit, provided your rent is being paid on time each month.

In fact, some rental housing providers report that information to the credit reporting agencies, which means renting can help you buy a home in the future. You may want to ask your property manager if this is something they do. That way, paying your rent every month could strengthen your credit, while you save and wait for the right time, location and house.

Buying a home isn’t for everyone. But if you think you might be in the market soon — perhaps in the spring — now is the time to get ready. Download your credit report and make sure there are no errors on it. If you need to pay down some bills to get your debt-to-income ratio down, now is the time.

Do your homework, and you’ll truly be ready to buy a home.

Francis Creighton is the president and CEO of the Consumer Data Industry Association, based in Washington.

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