Getting Your Credit Right for a New Home

Improving your credit score is one of key factors in preparation for the purchase of a new home. The reason why so much emphasis is placed on a credit score is because lenders utilize the information to assess the risk involved with a borrower’s ability to pay the loan back over time. In the home buying process, a credit score of about 620 will put you in a good shape to apply for a home loan. If you’re score is below a 620, you may still qualify for a home at a higher interest rate.

If you’ve never, or rarely, run a credit report then that’s the first place to begin. Running your own personal credit report and requesting your score is no penalty to you and will have no affect on your credit. It’s best to see a report and score from all three major credit bureaus—Equifax, Experian, and TransUnion because there may be variations in each report and/or score. Once you get your credit report follow these steps:

Analyze Your Report – Check for errors, inaccurate account information, items you want to dispute. After taking this first look, you’ll be able to determine where to go next with improving your credit.

Pay Bills On Time – Keep your credit score high by continuing to pay bills on time. Payments made after 30 days are often sent to collections and that gets reflected on your credit report. Avoid this by making sure you are paying at least the minimum amount due each month.

Don’t Make Any New Large Purchases – Avoid making large purchases before you get ready to buy a new home. Buying a car just a month before applying for a home loan can affect your credit score and add to your debt. Even once you have a home under contract, the bank will check your credit score again just before you close on your home so the best thing to do would be to hold off on large purchases.

Reduce Your Debt to Income – Your debt to income ratio is formula that the bank calculates to determine if you have enough income to afford your monthly home payment. You can determine your monthly debt by adding up the minimum payment amount due on each account you have open including credit card payments, car loans, student loans, and any other outstanding debt. If you find that your debt is approaching 35% of your gross income, then you may want to look at paying off some small balances in full.

Pay off Small Balances in Full, if you can – If you can afford to pay off small balances on major credit cards, store credit cards, or installment loans, then go ahead and pay those balances off in full only if your small balance accounts are current. Paying off collections is a totally different topic. There will be no need to pay off the balances and close the account. Keeping the account open once it’s been paid off can actually be good for your score.

Keep Older Accounts Open – This is actually a good thing even if you aren’t using the account because one of the factors in calculating your FICO score is how long you’ve had accounts open. If you have an old credit card that hasn’t been used but is paid off, keep the account open because it will help your credit score over time.

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Filed under Information for Buyers, Information for Investors, Information for Sellers

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