Purchasing a home with a mortgage requires a good credit score. Unfortunately, it’s all too easy for a credit score to be lower than expected. If you’re planning on purchasing a home in the next few months, take the time to learn more about the impact your credit score will have and how you can start now to improve your credit score so you can get the home of your dreams. When you’re ready, a lender can help you get a mortgage and be able to purchase the house.
How to Check Your Credit Score
Before thinking of applying for a mortgage, it’s crucial to check your credit score. You should know what the credit score is well in advance so you can make changes to improve it if needed. Each person is able to receive a free copy of their credit report each year from Experian, TransUnion, and Equifax. Visit annualcreditreport.com to view this report. This does not give the score, but it will show you what is on the credit report. There are providers that will tell you the credit score, and your bank may be able to as well. Once you know the score, you can look into the next steps you should take.
Why a Good Credit Score is Important
A good credit score makes a huge difference when you’re buying a home. Credit scores are used by lenders to determine whether they should offer you a loan. A low credit score tells then that you may not pay off the mortgage on time, which means you’re riskier to loan to. When this is the case, they can either decide to deny the loan or to offer you a loan with a higher interest rate. This can mean thousands of dollars over the life of the loan. When your credit score is high, it shows that you pay debts on time and are not a high risk. This means you’re more likely to be approved for a mortgage, and you’re going to get a much lower interest rate that will help you save money.
When to Start Improving Credit
It’s ideal to start working on your credit score as soon as you make the decision to purchase a house. The more time you have available, the easier it will be for you to make changes and ensure they appear on your credit reports. Some of the ways to improve your credit score may take a couple of months or longer to make a difference, so starting immediately and giving yourself at least a few months can enable you to fix the credit score before you start looking for a mortgage.
Fix Any Issues on Credit Reports
Once you know what the score is and what’s on your credit report, go through them carefully to see if there are any issues. Keep track of anything that is negative or inaccurate, as these will need to be corrected to boost your score. If you do notice anything that is inaccurate, be sure to dispute the information on the report. Since more than 20% of Americans have at least one major error on their credit report, this isn’t something that’s unusual to find. Dealing with it quickly, however, can help boost your credit score and ensure it accurately reflects your finances and your debts. If you do need to report errors, be sure to follow the instructions from the credit borough carefully and give yourself enough time for it to be fully resolved before you start looking for a mortgage.
Start Paying Down Debts
Once you’ve reported inaccuracies, it’s time to start paying down debts and clearing any negative accounts from the credit report. Go through each item on the credit report to determine what needs to be paid off now. With credit cards, it’s ideal to have a low balance, typically below 30% of the available credit. Keeping a balance shows that you are using the credit, but keeping the balance below 30% shows you are responsible with the credit and can help boost your credit score significantly. The faster you are able to pay down these debts, the faster your credit score will improve. Give at least a month once the balances are paid down for the credit score to reflect the changes.
Avoid New Debt or Closing Accounts
In most cases, it’s crucial to avoid adding new debt or closing accounts in the few months before you’re ready to buy a home. Taking on new debts negatively impacts your credit score for at least a little while. Closing an account could hurt your credit as well, and it can make a difference if the account closed was one you had for a long time. A part of the credit score is based on the length of your credit history. If you close a long-standing account, you don’t have as long of a credit history, so your score can suffer. Wait to take on new debt or close accounts until after the home has been purchased.
For Very Low Scores, Obtain New Credit
The advice to avoid taking on new debt may not apply to those who have a very low credit score. If this is the case, opening a new credit card can help boost your credit score within a few months. Only open one account and see what a difference it can take. For low credit scores, it may be easier to obtain a store credit card or to get a secured credit card to start with. By keeping the balance low and paying the credit card on time, it is possible for you to see an increase in your credit score.
If you’re interested in buying a house but worried about your credit score, start today by looking up the score and seeing if there’s anything you need to do to improve it. If you need any assistance, Fellowship Home Loans is available to help. Contact our Loan Officers today to get the help you need.
