Fixing Your Credit So You Can Buy A Home
How Your Credit Score Affects Your Home Search
Tips For Improving Your Credit Score
When looking to buy a home, you are going to need to review your current financial situation. One of the most important things that will impact your home buying experience is your credit score. It's important to know what your credit score is, and how it will impact the types of homes that are realistically available to you.
Factors That Determine Your Credit Score
Credit scores are calculated based on a number of factors, here are three of the most prominent factors that determine your credit score.
- Your Payment History: The biggest factor when it comes to determining your credit score is the consistency of your payments. Any missed or late payments are going to drag your credit score down.
- Your Debt Compared To Your Credit: The difference between the amount of debt you have versus the amount of credit you currently have also impacts your credit score. Having a small amount of credit and debt will favorably impact your credit score.
- Credit Length History: The length of time that you have held credit is another factor that will positively affect your credit score. If you can show lenders that you have successfully held credit for an extended period of time, it will increase your credit score.
Typical Homebuying Credit Score Ranges
If you know your current credit score, you might be curious to know what the typical ranges are for those looking to buy a home, and what is considered a "good" credit score versus a "bad" credit score. The numbers below are representative of the FICO credit scoring system, which is the most common credit scoring system in the US. The higher the number, the better your credit score is.
580 - 669: Fair
670 - 739: Good
740 - 799: Very Good
What Does Your Credit Score Impact When Looking For Homes?
Your credit score can impact three important factors when looking at mortgage loans. Firstly, your credit score can impact the amount of money a lender wants for the down payment. With a poor credit score, a lender might want a significantly larger down payment depending on the price range of homes you are looking to buy. Secondly, your credit score will actually limit the type of home loans you can obtain. With a lower credit score, you might want to go with an FHA loan, which means that your loans are backed by the Federal Housing Administration, in order to present less risk to the lenders. Because your options for loan types are limited, the interest rate on your mortgage is also impacted by your credit score as a result. While an FHA loan is more forgiving on the down payment and yearly interest rates than other loans available for those with poor credit scores, these types of loans are typically not favored as much by sellers as other more conventional loans.
Ways to Increase Your Credit Score
Pay Remaining Debt
One of the best ways to start working on building your credit score back up is to pay off as much remaining debt as possible, which seems fairly obvious. The reason that this is beneficial is that by paying off your debt, you are lowering your Debt to Income ratio, which is something that lenders look at when determining whether to provide you with a loan. You typically want a DTI ratio that is lower than 40%, when looking to buy a home. If you are curious about what mortgage payments would look like for you currently, you can utilize my mortgage calculator to simulate a mortgage on a home.
Don't Open New Lines of Credit OR Close Lines of Credit
As mentioned above, opening new lines of credit can negatively impact your credit score, but what you might not know is that closing lines of credit can also have an adverse effect on your credit score. By closing a line of credit, even if it is paid off, you are impacting your score by severing a length of credit history that would otherwise be available for lenders to consider.
Keep Your Credit Spending To A Minimum
Make sure that you are using your lines of credit to a minimum, as you don't want to increase the amount of debt you have compared to your amount of income, especially if you are paying off debts.
Disputing Errors on Your Credit Report
When looking at your credit report, check it over in detail to try and find any potential errors on the report. If you notice any errors, find any evidence you have available in regards to the error and then dispute it with the company you received the report from in order to get it removed. You could potentially have correctable errors in your credit report that are lowering your score, and affecting your ability to buy a home at an affordable price.
Stay on Track With Any Current Payments
While it is important to pay off remaining debts, it is also important to stay up to date with any payments you are currently making. Having late payments can drag your credit score down, so it is crucial to pay attention and make sure to set reminders that keep you on track with your payments.
Contact Me For A Complimentary Consultation
If you would like to further discuss ways to improve your credit score and start looking at homes that are realistic within your budget, contact me at (404) 576-8515, or by filling out the contact form below!