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 could mean big savings when you purchase, and it’s never too early to start preparing.
Check out the seven tips below to help beef up your creditworthiness before buying a house.
Even if you’re still on the fence or you’re unsure about becoming a homeowner, start now. Good credit will aid you in a multitude of areas beyond homeownership, so why wait? It’s important to note that some credit issues can take over six months to reconcile, so make sure to get on top of your credit sooner rather than later.
Your credit and financial profile are outlined on your credit report. You can visit annualcreditreport.com to get your annual free report. The key to staying on top of your credit is to be aware of what your profile looks like. Your credit report will include your credit history in terms of how long you’ve managed credit, your total debts, and your rate of repayment — all factors reviewed by mortgage lenders.
Beyond getting your initial credit report, be sure to stay on top of your credit score. There are a number of resources online to you help monitor your credit score, as well as alert you when your credit lifts or lowers.
Evaluate your finances closely. List out all of your expenses, specifying which expenses are recurring and which ones can be removed altogether. Cutting back on your monthly or daily expenses can help you pay back your debts, which significantly impacts your creditworthiness, as detailed below.
Mortgage lenders will review your debt-to-income ratio when evaluating your ability to repay your loan. Assess what you owe, and put together a budget plan to lower these balances as much as possible in a reasonable amount of time. Set goals and hold yourself accountable. For example, perhaps you determine that you will pay off 10% of your student loan debt in the next 90 days.
When it comes to credit card debts, try to pay above the minimum amount due every billing cycle. Another option is scheduling your payments earlier than the date the bill is due. This will not only speed up the pace at which you clear your debt, but it also positively reflects your diligence toward repayment.
Additionally, try and get your total debts below 30% of your limits. For example, if your total credit limit on a card is $1,000, get your total balance due below $300.
Late bill payments will negatively impact your creditworthiness and will also cause you to get hit with late fees, which will only set you back in your plans for decreasing overall debts. Map out all of your bills, their due dates, and set reminders to ensure you’re able to pay everything on time.
A hard credit inquiry, often referred to as a hard pull, indicates that you’re actively trying to get credit. Examples may be applying for a credit card, personal or business loan, or an auto loan. Hard inquires can lower your credit score, so limit your credit applications prior to applying for a mortgage.
We recommend limiting your expenses once you have lowered your debts, and avoid any large purchases on your credit card before you apply for a home mortgage loan. Buying a car, expensing a big vacation, etc. will impact your credit score, often times negatively. Additionally, be sure to avoid any big financial changes in your life, as these will raise questions during your credit review.
Financial diligence is a skill that will serve you before, during, and beyond the home buying process. Be sure to consult a mortgage banker with any credit questions, or more help with getting your credit ready before buying a home.