Before first-time homebuyers pull the trigger on buying a new home, they should understand some common myths in the credit reporting industry. As an agent, you should be ready to clear up those myths and explain how they might affect clients during the prequalification and preapproval process. Here are a few of them.

1. ‘Closing an old account will help my credit’

This might be one of the most common misconceptions around how unused accounts, like credit cards, can impact creditworthiness. One of the main factors that lenders look at when reviewing your clients’ credit history is how long accounts have been open.

They typically average all current and past accounts to get an average length of time. The longer your credit history, the better. By closing an old account, you are effectively reducing the impact that individual account may have on your overall credit history. Instead of closing the account, keep it open.

Companies such as Credit Karma, Credit Sesame, and even the major three credit reporting companies such as Equifax, Experian and TransUnion offer ways to improve or “boost” credit. However, buyer beware.

These companies can only assist you with creating a plan to pay down or consolidate debt. They cannot magically make or reduce the amount of debt a person has — this can only be done by paying off an account.

Instead of paying a company to put this plan together, homebuyers can create a spreadsheet with their recurring expenses along with their monthly income to visualize what debts can be paid down over a period of time.

4. ‘Paying off a collection or debt removes it from my credit report’

Undeniably false. In fact, a derogatory mark like a collection or missed payment can stay on your credit report for up to seven years. While paying this off will stop future attempts by the collection agency or banking institution to collect on the debt, there is no way to remove a derogatory mark from your credit report unless it was reported incorrectly due to fraud or identity theft.

5. ‘My relationship status or divorce is reflected on my credit report’

Information like income, employment and relationship status are not reported to credit bureaus. Questions regarding this information will likely be asked during the credit application process in conjunction with your credit score.

However, they will not show up on a credit report. This is important for those going through a separation. If one partner does not pay a debt and the other partner is on the account, it will negatively impact both parties.

Now that some of these misconceptions have been put to rest, your clients should be ready to speak to their lenders about getting preapproved for a home loan. In today’s market, lenders can even help formulate a plan to help homebuyers pay down debt to be approved for a better interest rate.

As a real estate agent, you can be a great resource homebuyers can turn to while going through the initial stages of the homebuying process. Your vast knowledge and years of experience are unparalleled in the industry.

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