Credit is a big factor in the home buying process, and can sometimes be the cause behind either delaying, halting, or avoiding homeownership. Don’t let credit be the issue that obstructs your dream of owning a home. A good credit score can mean big savings when you purchase, and it’s never too early to start preparing.
Why your credit score is crucial
More or less we all follow the credit scoring system referred to as FICO score. It consists of a three-digit number anywhere between 300-850. It is commonly used by lenders and creditors to determine the applicant’s creditworthiness.
Normally, your credit score is determined by considering each of the below-mentioned five factors in your credit report, according to a set standard.
- Your payment history – 35%
- Your outstanding debts – 30%
- The length of your credit history – 15%
- Your credit mix – 10%
- The number of new credit lines – 10%
You may face an issue with your application rejection if your credit score falls below 650. If your score keeps going down, then you should put more effort into cleaning up your report and building your credit score. It is possible to improve your credit score within 6 months if you work hard and follow strict financial rules.
You know that after applying for a mortgage, the lender might sneak into your credit report. But what exactly does a lender check before approving your application?
Let’s find out!
Lenders may check:
- Your identity and job history – You need to make sure that all the documents and proofs you are submitting are genuine and completely legit.
- Your credit reports can hurt your credit card when you apply for too many credit cards. For every application, the lender will fetch your credit report and verify the facts. This may end up having five or six inquiries on your credit report. In case of multiple inquiries are made during rate shopping, they are generally counted as one inquiry for a given period of time. This may vary depending on the credit scoring model used, but it’s typically from 14 to 45 days. So, naturally, the lender might get suspicious about your creditworthiness. Credit reporting agencies will also check inquiries if they need to.
- Your past debt records and your credit report reveal how you handled your credits and debts previously. They normally check your credit limits, any late payments, the total duration of debts, etc.
- Your public records information – This record credit report adds up to items like bankruptcies, foreclosures, and liens.
Check out the 7 tips below to help beef up your creditworthiness before buying a house.
1. Start this instant!
If you have a decent score and are still hesitant about buying a home, it is suggested that you should start searching for a new one immediately. Good credit is an asset that may help you get the best deal while you shop for a new home and also for the mortgage. You must remember that due to any sudden financial crunch or any wrong decision, your credit report may add some information that might impact your score. So make sure to get the most out of the market through your credit sooner rather than later.
2. Avoid hard inquiries
A hard credit inquiry might be considered as if you’re actively trying to build your credit score. The lender may assume that you are applying for a credit card, loan, or auto loan. Hard inquiries can lower your credit score, so try to avoid it as much as possible this time. Limit your credit applications before applying for a mortgage.
3. Monitor your credit
This is one of the most important credit tips for homebuyers. Everybody knows that our credit report is the ultimate map of our credit and financial profile. People can get their free credit report from annualcreditreport.com once every year. It is crucial to review your credit report as it will help you to stay on top of your credit. Your credit report will include your credit history which shows how you’ve handled your credit for a long time, what your total debt amount is, and the rate of the interest payment – all these factors will be reviewed by mortgage lenders.
You must monitor your credit reports to avoid any negative impact on your credit score.
4. Pay off credit card balances
Your credit utilization ratio is also important while you hunt for a new home. Your credit utilization ratio impacts about 30% of your overall credit score. The higher your ratio, the more it will impact negatively. Most professionals may suggest that you keep it under 30%.
Also, you must remember that higher credit utilization means more debt, more payments, and fewer funds available for your down payment, monthly mortgage payments, and other related costs.
5. Don’t apply for new credit for 6 months
Your credit score might take a blow if you apply for a new credit card or loan. It might cost you a few points, but what if your score is already low? A credit score drop by a few points might make your situation worse. Losing your credit score may put you below your lender’s cut off-limit.
Your score also factors in the average age of your credit account. So, opening a new account may also drop that average, specifically if you maintain only a few credit accounts with a short credit history.
6. Be current on bill payments
Late bill payments will negatively impact your credit score. Late payments will stay in your credit report for 7 years. Late payments also charge you late fees, which will only set you back financially. Make a plan, list all your bill payment dates, and set reminders to pay every single one on time.
7. Know what lenders are looking for
Review the minimum requirements to qualify for a mortgage. Talk to your lender and get all the details. It will help you to focus your efforts on meeting those requirements. The more you talk to your lender, he will trust you and if you have less-than-perfect credit or are short of funds, he might consider your situation and help you.