The first step in home buying- Check your credit.
Before you start looking for a new home, take a look at your credit, and understand where you stand financially.
Credit scores are symbols of your ability to repay debts. Mortgage lenders look at this number first when reviewing your credit worthiness. If you are applying for a mortgage loan with a spouse or partner, it is important that they go through these steps too.
A mortgage credit report will usually contain scores from each of the three major credit-reporting agencies: Equifax, Experian, and TransUnion. Your lender will use the median, or middle, score for the purposes of home loan pre-approval.
Your credit scores can also affect how much it costs to borrow. With a strong credit score, you are more likely to secure financing with a great interest rate.
Many other factors go into loan financing, and credit score requirements aren’t as stringent as they once were. However, a low score can still be a problem. Conventional lenders often require a 660 FICO score, but you’ll usually need a much higher score to access better interest rates.
The first step is to check your credit report. You can do this once every 12 months for free through annualcreditreport.com. Then take steps to improve your credit status.
Create good habits
Depending on how you use it, your credit can make or break your finances. Establishing healthy habits is crucial for building a strong credit profile.
People with excellent credit tend to share some common traits, including the following:
- Staying on top of monthly payments: Slow and steady wins the race here. Remember, it’s all about building a history of on-time payments. Creditors won’t usually report late payments until they’re 30 days past due. Your credit score can continue to take deeper hits as outstanding balances cross the 60-, 90-, and 120-day marks.
- Keeping credit card balances low:Having high balances on multiple credit cards tells lenders you’re pushing your credit (and possibly your finances) to the limit. That isn’t a good place to be when you’re thinking about taking on a mortgage. Try keeping your balances under 30% of your credit limit.
- Avoiding slews of credit inquiries:Try to limit hard inquiries on your credit report. These might cost you only a few points, if any, but multiple inquiries within a short period of time can be problematic. Sudden credit grabbing can be a sign of financial instability.
- Avoiding opening and closing accounts: When you start thinking about buying a home, it’s best to keep from making big changes to your credit unless you’re absolutely sure of the impact those changes could have on your scores. New accounts come with new monthly obligations that can eat into your house-buying budget. And while it’s usually a good idea to free up space on existing credit accounts by paying them down, closing an account can actually lower your credit scores.
- Taking care of derogatory trade lines:Unresolved issues on your credit report can cast a shadow over your home-buying chances. Don’t leave outstanding balances unpaid, and be sure to resolve any matters of public record as soon as possible. Issues such as tax liens and landlord disputes will not only damage your credit scores, they’ll also usually need to be resolved before you can close on a home.
Correct your credit report
Your free credit report will give you a good indication of where you stand and what might need some work. More importantly, keeping track of your credit can tip you off to any errors, outstanding derogatory accounts, or signs of fraud.
Keep an eye out for these red flags on your credit report:
- Discrepancies in your basic information
- Incorrect address history
- Accounts you don’t recognize
- Falsely reported late payments, collections, or items of public record
- Inquiries that you didn’t initiate
Report any errors or inconsistencies on your report to each of the three major reporting agencies and the creditor. Be sure to do so by phone and in writing.
Paying your bills on time, keeping account balances low, and keeping a close eye on your credit report can go a long way toward helping you build mortgage-ready credit.
