Currently, interest rates are historically low, and the economy continues to improve. Factors such as these make becoming a homeowner a far more realistic endeavor. If you have interest in homeownership, knowing your credit score is a critical aspect to the homebuying process for a number of reasons.
Understand the impact your score has
When applying for a home loan, ensure you obtain a copy of your credit report, as it determines whether you are approved by a lender and the interest rate affixed to the final loan product you wind up with. So, knowing your score and ensuring it is as high as it possibly can be prior to applying for a home loan is critical.
Bankrate noted your credit score is the most influential factor that lenders consider when you apply for a home loan.
"Lenders look at several variables on the credit report: outstanding debt; the outstanding debt relative to the total available debt; the length of the credit history; and the pursuit of new credit – how many inquiries are on your report," said Matt Hackett, underwriting manager at Equity Now, a direct mortgage lender.
Individuals with a credit score below 620 will likely not be able to land a conventional mortgage. However, someone who has a credit score of 740 or more will likely qualify and secure a good rate. A better rate can save you thousands of dollars over the life of your mortgage.
"When applying for a home loan, ensure you obtain a copy of your credit report."
Improving your credit score
To get your financial track record back in good standing, you'll want to first obtain credit reports from Equifax, Experian and TransUnion. It is critical to check that all information is correct. Any inaccuracies could be hurting your score and should be reported.
"Sometimes people will quickly glance over their information and that's it. But you should take the time and look at the account numbers," says Steve Katz, senior marketing communications executive for TransUnion, according to Bankrate.
By utilizing the services of a credit repair company, you can take advantage of the knowledge and expertise that professionals offer.
Bankrate suggested obtaining your credit report at least a year before purchasing a home. This gives you much more time to work toward improving your score.
One way many people try to improve their scores is by closing credit cards. However, this may not help.
"Closing unused credit card accounts may not help you improve your FICO score," said Jeffrey Scott, a spokesman for FICO. "It may be more beneficial to pay down your revolving balances. You can also take a credit card out of your wallet and put it in a drawer to avoid the temptation to use it."
When working to improve your score, you will want to keep credit card balances low, noted Bankrate. Ensure you do not max out your credit cards, as this may indicate being unable to properly use credit.
Alternatives for lower credit scores
If your current credit score is low, and you are unable to raise it substantially for whatever reason, you can still potentially become a homeowner. Work toward providing a more substantial down payment, and lenders may look at your loan application more favorably.
Consider taking on a part-time job or turning your favorite hobbies into profit. Withe websites, like Etsy, you can post crafty products online to sell and make a little extra money. Use additional funds toward a new home to increase your chances of becoming a homeowner.
What does a credit score measure
A credit score is similar to a report card for your past spending habits. If you regularly practice good financial responsibility, your credit score will likely reflect that. However, if you do not, your score may be lower.
While your spending habits typically dictate your credit score, there are some instances when incorrect information lowers your score. Errors can have a negative impact and unfairly keep you from securing a low interest on a home mortgage or even getting a home altogether.
"A credit score is similar to a report card for your past spending habits."
How will a mortgage impact your credit score
Just as your credit score affects whether you qualify for a mortgage, the home loan will also impact your credit score. According to Ready for Zero, mortgage debt is considered responsible debt, so staying current on your monthly payments will reflect strong financial responsibility. Approximately 10 percent of your credit score is composed of the types of credit your report is comprised of. By mixing up your credit history and demonstrating your capacity to repay the debts you collect you can improve your score.
If you do not feel capable of staying current on mortgage payments, it may indicate you are not yet ready to purchase a home, as it can negatively impact your score making it more difficult to obtain other types of loans in the future.