It has been our goal for a while to purchase a home. We especially wanted a brand new home, but none of it is possible without taking the necessary steps. You may not have to do every step I will mention during this series, but it is vital to check all before purchasing. It is a must to review credit history beforehand.
Review Credit History
One of the most important things to do during the early research is to review your credit history. Everyone is entitled to receive a free annual credit report from all three major credit bureau; Equifax, Transunion, and Experian. You have to be aware of everything on your credit history that may impact your borrowing abilities.
Once you have reviewed your credit history, you can check your credit score through credit karma, or if you have a credit card, the bank may provide your free FICO score. A higher score is the single most important way to earn a lower mortgage interest. There are additional factors that may impact your mortgage interest rate (will talk about this later during this series).
So, what happens when you find errors on your credit report? You can correct your credit history yourself. Do not pay anyone to fix your credit history. If you find fraudulent activity, report it immediately.
Someone close to me used my information to open credit card accounts. I realized this was the case when I started receiving multiple calls from debt collectors. By the time I was aware, my credit score was damaged. My score went as low as 402. Thankfully I didn’t have to borrow at that time.
I called all three credit bureaus to place a fraud alert on my account to avoid such from happening in the future. Since this person was someone very close, I made sure they paid for every dime they took under my name.
Within two years, my credit score went from 402 to 650. My current credit score ranges between 760 and 790 every month. If you decide to buy a house next year, review your credit history now, and continue to monitor it. As an FYI, the credit scores range from 300 to 850.
With a credit score of 740 and above, you get an excellent interest rate. You are considered the best. You will also avoid paying loan points and many other fees.
I cannot stress enough about how crucial your credit score is to the home buying process. It determines whether you qualify for the loan in the first place, and it also has an impact on your mortgage terms (more on that later in the series).
Need to Buy a House-Review Credit History
Now, you don’t need a flawless credit score to buy a house. However, the downside of borrowing with a low credit score is the amount you will pay by the end of a 30-year mortgage. It can cost you thousands of dollars over time. Lenders reward borrowers with high credit scores because their risk is much lower.
I recommend waiting till you have a credit score of 620 and above if you want a reasonable interest rate for would-be buyers. A higher score is better but at least 620 as a start.
Ways to Strengthen Credit Score/History
Pay Bills on Time
Paying your bills on time is essential to building a high credit score. It is the biggest factor. I have not paid interest on any of my credit cards in the past five years since I only use my credit card for purchases I can afford to pay right away. I understand there may be emergencies, and you may need to spend above your means and may not have the full amount to pay. As long as it is not a habit, and you are not carrying over interest month to month. My goal is to avoid paying extra money on my credit cards than I spend.
Keep Credit Card Balance Low
If you can, do not use more than 30% of your available credit on your credit card. Your credit utilization is the second biggest factor to determine your credit score. Even when you use 900 dollars of your 1000 dollars available credit, and pay it off the next day, the amount will still show on your credit history. So, if you can, avoid using the above 30%, lower is even better.
Check Credit Report
I mentioned this above, check your credit report every year.
Keep New Credit Cards Open
Unless necessary, do not close your credit card account, especially if you have had the account for ten years. When you close an account, it reduces the amount of credit you have available, which can hurt your credit score. I closed all the accounts the person opened in my name because there was no benefit to keeping them open.
Mix of Credit Cards
Having a mix of credit cards does a lot of great things. You want to have installment accounts such as student loans, car loans, mortgage loans, and other types of credit accounts. It allows lenders to know that you have a diverse credit line.
Another thing, if you purchase the house with a spouse, family member, or friend, the interest rate is based on the person with the lowest credit score. In our case, my husband’s 805 credit score didn’t matter. Luckily, my credit score was above 740, so it didn’t matter as much. Keep in mind that when two people apply, the lender looks at both incomes. The advantage of two people applying is that you may qualify for a higher amount compared to one individual.
Once we reviewed our credit history and report, we knew that we were considered one of the best borrowers. So we moved to the next step of the home buying process-Down Payment Strategy. Now that we have reviewed the credit card process, come back tomorrow to read about how we saved towards our down payment.
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Catch you later!
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