Paying cash for a home is a luxury few can afford. Thus, most homebuyers resort to loans to get the home of their dreams. But first, they have to know what it takes to qualify for a mortgage. They have to make sure their credit score works for them. They have to know that everyone has a credit score, a number that predicts if they can pay the loan when it’s due.
Factors that determine a person’s credit score are:
- Bill payment history
- Indebtedness level
- Number, type and duration of loan
- How much available credit is being used
- New credit applications
- The presence and date of debt sent for collection, foreclosure, and/or bankruptcy
From here, companies decide whether someone can avail of a mortgage, credit card, and other kinds of loans, or not. Credit scores also dictate interest rates on a loan or credit card, along with credit limit.
When buying a home, FICO (credit score developed by the Fair Isaac Corporation) plays a big role in deciding loan eligibility and mortgage terms. Lower FICOs do not disqualify a buyer from getting a home loan. But they lead to higher interest rates and bigger down payments.
In 2020, a homebuyer needed a credit score of
at least 620 to purchase a house, even if other lenders are fine with 580 or below. But a below-620 credit score is a red flag. It also requires a higher interest and extra fees. This kind of credit score also means bigger monthly dues that could have been put to better use elsewhere.
So, the first thing that needs to be done when one decides that it’s time to buy a home is to boost one’s credit score. Here are some tips.
- Pay bills promptly
Payment history is the number one basis of a credit score.
- Maintain a low credit card balance
Experts advise using less than 30 percent of one’s credit card limit. Companies check out credit utilization, or the amount of available credit a person spends, to determine a credit score.
- Get credit reports
Check credit card balance by setting up alerts with credit card companies or asking finance sites to provide regular updates about credit card activities. Equifax, Experian, and TransUnion provide annual credit reports.
- Keep credit card active
Closing a card lowers available credit, raises credit usage levels, and damages credit score. So use that card and pay promptly. This keeps the card company from closing the account due to lack of activity.
- Checkcredit mix
Add other loan accounts, like a credit-builder loan, or secured credit card to an existing credit mix of installment loans and one or two credit cards. This creates a more complete profile of payment history, reliability, and capacity to maintain various forms of credit.
- Seek help
Ask someone with a better credit score to act as loan co-signer, or request a friend or relative to include your name in the title. They can then refinance the home using your name.
Getting a loan to buy a home should be well planned. Check that credit score as soon as possible. And start taking the above-mentioned steps as early as possible.
If you’re thinking of buying a house in the Washington DC metro area, Heller Coley Reed is ready to help. Zelda Heller, Jamie Cole, and Leigh Reed’s team of professionals includes agents that help clients obtain the allied services they need. Call the team at Heller Coley Reed at 240.800.5155, email hellercoleyreed(at)gmail(dotted)com, or contact them here.