Why does Credit Matter when buying a home? Here are 7
In this article, we’ll explain exactly 7 ways to improve your credit before buying a home.
The process of buying a home begins long before you find your ideal place to live, and improving your credit score is one of the best places to begin.
One thing to understand is that there are three different FICO scores that you need to know in order to buy a home.
The three FICO scores are calculated from your 5 components of your credit report, but there are other factors that are taken into account as well such as your income, how long you have worked at your current job and the kind of credit you are trying to get.
The 5 components of your credit report are:
- Payment history. This is about 35% of your FICO score and one of the most important factors in a FICO score. This is why it’s so important to NEVER miss payments.
- Amounts owed. The second factor they look at is the amount you owe which is about 30% of your FICO score. It’s important to keep in mind that having credit accounts and owing money does not necessarily make you a high credit risk. This is one of the reasons why it’s a bad idea to buy a car before a home as we’ll explain later in this article.
- Length of credit history. The longer your credit history the better your FICO scores will be. The length of your credit history is about 15% of your score.
- Credit mix in use. When considering credit risk, FICO scores consider what mix of credit cards, retail accounts and loans you currently have. This accounts for about 10% of your FICO score.
- New Credit. The last factor in your credit is how much new credit you have applied for as opening several accounts in a short period can signal greater risk. This factor is also about 10% of your FICO score.
Improving your credit score will not only help you get approved for more loans, it will also help you save money by getting a lower interest rate on your loan and saving thousands over the life of the loan.
Now can you see why improving your credit is important?
Let’s take a look at exactly how you can improve your credit, before applying for a home loan.
7 Ways To Improve Your Credit Before You Buy Your First Home
- Get all your mistakes fixed. Did you know that 25% of people who get declined for a mortgage have errors on their credit reports? It’s its true. That’s one of many reasons why it’s important to monitor your credit closely so that you can catch any mistakes or inaccuracies on your credit before you apply for a mortgage. To find out exactly how to get an error off your credit report check out this 10-step guide.
- Pay more than just the minimum. Another way to build your credit is to always make payments that are greater than your minimum payment. Not only does a history of just making the minimum payment look bad to potential lenders, you’ll be able to save money on interest.
- Keep Your Balances low. An easy way to improve your credit score is to avoid having too much debt by keeping your balances below 50% of your limit on every card and account you have. The faster you can get your balances down, the better your score will look.
- Pay off what you can. Rather than moving your debt from card to card in a low interest shell game, it is better to pay off your debt, rather than get saddled with the hefty fees card companies are now charging those who move their debt from card to card.
- Don’t buy a car. One of the biggest mistakes that first time home owners buy is purchasing a car in the 3 months or so before applying for home loans. Auto loans affect your ability to buy a home
- Plan ahead. While it is possible to increase your credit score by up to 100 points. It takes time. You’ll want to take the time to make sure all of your ducks are lined up and that your credit cards are paid up before you apply for a loan. If you have enough time, try to pay down your debt before you even start filling out applications.
- Stay up to date. Last but certainly not least, you need to pay you bills on time. Every time you miss a payment, it leaves a ding on your credit report, so try to never miss payments. Ever.
If you’re considering buying your first home, you need to make sure you have a handle on your credit score.
Your credit score is a major factor in whether or not you get approved for a home loan as well as the interest rate that you get approved for.
A small credit score improvement could save you tens of thousands of dollars over the lifetime of your mortgage.
In this article we looked at 7 ways to improve your credit before applying for a home loan, including making sure to never miss a payment, not buying a car before you apply for a home loan, maintain balances less than 50% of your limits and more.
You now know everything you need to know in order to improve your credit and get approved for your first home!