Why You Should Check Your Credit Score Before Buying A Home

Here’s how your credit score affects the home buying process.

While there’s no strict credit score minimum to get a mortgage and buy a home, there are guidelines most lenders follow. While your credit score is a major factor in buying a home, it’s not the only one. Lenders also consider your employment history, income, and current debts.

And, since credit scores fluctuate, following good credit practices can increase your score and help you get a mortgage or lower rate in the future.

Most first time home buyers are looking to understand how the credit process works. A good credit score can mean the difference between qualifying for a mortgage loan and having your application rejected.

It is important to understand what your credit score means, and how it is calculated. These factors directly influence your eligibility for a mortgage, in addition to your interest rate. Even if you qualify for a mortgage, a lower credit score means you’ll likely be stuck with a higher interest rate. And that high-interest rate will cost you more over the lifetime of the loan.

How does your credit score factor into buying a home?

To understand how your credit score factors into home buying, you first need to understand the credit score basics. You’ve probably heard the phrase “FICO score” in credit card commercials, but here’s what it really is. FICO (which stands for Fair Isaac Corporation) is one of the most common credit scores. It’s used by banks and other financial institutions to determine your creditworthiness.

So, what makes you worthy? The bank needs to believe you’ll pay back your mortgage loan, and that FICO score helps them decide whether or not you’re a risk.

For them, the higher the credit score, = the lower the risk, which means that you’ll enjoy lower interest rates. And, for those with lower credit scores, the opposite is true. Your credit score plays a huge role in determining whether a bank believes you a risk to pay back the mortgage loan or not. If you are deemed a lower risk (because you have a higher credit score), then you will have a lower interest rate and pay less for the loan. But if you have a lower credit score, the opposite will be true.

Factors that affect a Credit Report

FICO scores use several different factors from your credit report. This information comes from the three major credit bureaus (Equifax, Experian, and TransUnion), and it is used to assemble a score ranging from 300-850. Here are the factors that go into your credit score:

· New credit 10%
· Types of credit 10%
· Length of credit history 15%
· Amount owed (30%)
· Payment history (35%)

What credit score is needed to buy a house?

Your credit score plays a big role in your mortgage application, but it is important to remember that it isn’t the only factor. Financial institutions will also consider factors such as your employment history, your current debts, your income, the size of the loan you are asking for, and the total amount you are willing to offer in a down payment.

There are no hard lines when it comes to a minimum credit score. Instead of an exact answer on what is the right credit score to buy a house, most financial advisors use guidelines for home buyers. The guidelines help home buyers to determine if they are on the lower limits of an acceptable credit score or not. Here are a few credit score guidelines for the most common types of home loans:

Loan Types

When does your credit get checked in the home buying process?

When does your credit get checked in the home buying process? Well, once you send in your credit application to a lender, they are going to check your credit score. It is one of the first things they will do to determine whether you are eligible for a mortgage. If your credit score is too low for a particular lender, then they’ll use it to weed out your application before they go further and check things like your income and employment history.

Check your credit score for free by asking any of the three major credit bureaus (Experian, TransUnion, Equifax) for your credit report. Your credit report won’t just include your credit score — it will also include all of the factors that led to the final number. So you’ll be able to look and see if an account you forgot to pay, or a high credit utilization is dragging down your score. If your credit score isn’t as high as you’d like, don’t fret. You might not qualify for a mortgage right away, or you might not get the interest rate that you want right off the bat. But you can improve your credit score over time.

Types of home loans

Not all mortgages are made alike. There are several different types of home loans, and they have key differences. Here are the most common types of mortgages available on the market:

· Conventional loans
This is the most typical option — two-thirds of mortgages are conventional loans. Unlike FHA and VA loans, these loans aren’t backed by the government. Lenders will generally ask for a 20% down payment. If you can’t make that amount, you can pay as little as 5%. But going with a down payment under 20% means that you will have to pay for private mortgage insurance, which can be expensive. These loans typically have a 620 minimum credit score.

· FHA loans
FHA loans are a are a valuable option for those with lower credit scores, as the minimum score for an FHA loan can be as low as 580. FHA loans also allow homebuyers to put down as little as 3.5%. Still, you’ll need to pay PMI if you decide to put down less than 20%, similar to a conventional loan.

· VA loans
VA loans are limited to veterans and current members of the US armed forces. They are especially attractive because home buyers seeking this type of loan can put as little as 0%. In addition, there is no PMI penalty for putting down less than 20%. VA loans are backed by the federal government, and lenders are not required to use a minimum credit score.

Is there a risk in having your credit checked multiple times during the application process?

When you apply for a mortgage, the credit check is listed on your credit report as an inquiry. That means that you are looking at taking on new debt. A credit inquiry will have a small negative impact on your overall score, but there isn’t much you can do about it.

You should also know that shopping around for a mortgage isn’t going to harm your score. If you have multiple credit checks from mortgage lenders within a 45-day period, it will be reported as a single inquiry. You can shop around by completing mortgage applications, getting a preapproval, or getting an official loan estimate.

Other types of credit applications can also have a negative impact on your credit score. Applications for credit cards, car loans, student loans, personal loans, and business loans can also result in an inquiry on your credit report that lowers your score. If you are considering shopping around for a mortgage, then you want to make sure that you avoid applying for a car loan, credit card, or another type of debt so that a new inquiry doesn’t push down your credit score.

The difference between a hard and a soft check

There is a difference between the types of inquiries that get listed on your credit report. Inquiries are separated into two categories: hard and soft.
Hard inquiries occur when a lender uses your credit report to make a decision on whether or not they will provide you with credit. Credit card applications, car loan applications, and mortgage applications are all forms of hard inquiries.

Soft inquiries occur when a credit card company checks your credit to pre approve you for a new credit card or when you check your own credit online. Soft inquiries aren’t listed on your credit report and they don’t impact your overall credit score.

How to improve your credit score

If your credit score isn’t where you want it to be, don’t get frustrated. You can improve your credit score over time. The first thing you should look at doing is lowering your credit card balances. Your card utilization rate plays a factor in your overall score. You’ll also want to make sure that you pay any unpaid debts as well as paying your bills on time. By paying off old accounts and keeping your new ones in good standing, your credit score will rise over time. You should also avoid taking out new lines of credit if you don’t have to. If you are making multiple applications for lines of credit, lenders will think that you are strapped for cash.

It will likely take months, at the earliest, to have a dramatic positive impact on your credit score. But following good credit practices, you can improve your score and put yourself in position to qualify for a mortgage or get a better rate.

 

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10 Ways Homebuyers can Improve Credit Scores

10 ways homebuyers can improve credit scores

Buyers will find it easier to get a home loan using these tips…

 

by Johnson Fedrick

 

Key Takeaways

  • It’s better to have two credit cards if you are a definite credit card spender.
  • Maintain a good mix of good and bad loan, AKA a healthy credit mix.
  • Close your unwanted savings bank accounts.

 

Real estate is a booming business in the world. To get loans quickly, potential homebuyers need to keep an eye on their finances and credit.

 

Below, you will find 10 general tips that will help ease the process of acquiring a home loan by improving credit scores.

 

  1. Always pay on time

No lender likes to lend money to an individual who has a repeated record of missing his payments. This indicates a lack of discipline and poor financial management, and it leads to a bad impression on paper.

Whether it was intentional or due to genuine reasons is immaterial. If you have a frequent history of missing your equated monthly installment (EMI), you will end up with a lower FICO score.

 

  1. Keep your credit owed within limits

A good ratio is not having your unsecured credit outstanding above 50 percent of your annual salary. Keep your credit card balances within half of the allowed limit. If you have $10,000 as your limit, then it is wise to restrict your statement amount to $5,000.

 

  1. Always pay your dues on time, in full

This is one of the most important tips to improve credit score: On-time payments improve your credit score tremendously. It carries almost a 40 percent weight on your score. So try not to miss your due dates for EMIs and monthly payments.

Nobody likes a person who cannot keep up his or her word, especially with banks. So pay in full and on time. Why should you suffer unnecessary late payment charges and interest?

 

  1. Use two credit cards if you are a definite credit card spender

This is good and bad advice at the same time. FICO does not consider spending money on two credit cards as one. But if you have two credit cards, you can keep your usage percentage in control.

For example, if you have a credit card with a limit of $20,000, and you charge $15,000 on it, you’ve used 75 percent of your credit limit.

Now if you split your amount into two, and spend $7,500 each, then the percentage of usage will be around 37 percent. So it helps you in the eyes of FICO.

Now, don’t go on a credit card shopping spree.

 

  1. Maintain a good mix of good and bad loans — AKA, a healthy credit mix

Home loans and business loans are considered good loans. Personal loans and credit are considered bad loans.

That is why investing in a home loan if you are a spendthrift is a better decision. You will have a good credit mix and be building an asset.

 

  1. Pay high-interest loans and small loans first

It is a prudent decision to pay your home loans over longer periods. Pay off your personal loans, credit cards and private loans first, as they tend to have a higher interest (typically 15 percent to 36 percent) with no asset creation.

Home loans, on the other hand, are just 9 percent to 11 percent, but they build an asset. This is one of the underutilized logical tips to improve credit score.

 

  1. Close your unwanted savings accounts

Many people tend to abandon their savings accounts without closing them. If you have less than your Minimum Average Balance (MAB), it will start to affect your credit score. Also, when you finish a loan, it’s imperative to get the loan closure certificate.

 

  1. Check your credit reports regularly

Credit reports can be availed for a minimal cost. You can obtain them from the official FICO site. Just pay online and check your credit score at least once in a year, so that you can seek clarification on any mistake and have it sorted. There have been cases when banks report you to FICO by mistake.

 

  1. Monitor your co-signed joint accounts properly

In instances of co-signing a loan or maintaining a joint credit account, be careful when dealing with someone outside your close family. You need to monitor the statements closely to make sure everything is in order.

There is no use complaining if you chose the wrong joint holder who was careless.

 

  1. Negotiate if you cannot pay on time

This is also one of best tips to improve credit score. People often know that they would not be able to pay their bills in advance. Regardless, they do not take any action.

If you know you will not be able to pay on time, negotiate with your bank. Banks will be willing to extend your loan period and reduce the EMI if they see a genuine customer.

It might hurt, but you will make a good impression, and the bank will see you are honest.

 

So these are some of the tips to keep your credit score in check and get a home loan easily.

I read this article at: http://www.inman.com/2016/07/13/10-ways-homebuyers-can-improve-credit-scores/?utm_source=emailsubscribers&utm_medium=email&utm_campaign=inmanbest&utm_content=1

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