Credit Boosting Strategies for Prospective Home Buyers
Months or even years before buying a home, prospective buyers should take a look at their credit scores and their credit history. It's especially important for first time home buyers who may not have as much of a credit history as people who have owned homes in the past. When buying a home in Charlotte, most lenders are going to want to see a score of 620 though some lenders can make it work in the high 500s.
A home borrower's credit score and report make up a big portion of their ability to qualify for a mortgage, as well as the type and possible size of mortgage they get when they do. Having a great credit score can also help you earn a better interest rate with your mortgage lender. Whether one is looking to boost their score significantly or just climb up a few more points, almost anyone can take these steps to improve their credit.
Why Credit Is Important for Buying a Home
When interested buyers apply for a mortgage, they should understand how their credit history is used in the process. Credit scores are not lumped into a single question wherein some applicants pass and others fail. While some people are unable to get a mortgage due to their credit history, those who will likely qualify still need to pay attention as their score may determine the options available to them. Having a FICO credit score of 720 is pretty good, and will open up favorable loan terms for some borrowers. Those who have a score of 740 or higher may even do a bit better if all else is the same. As a result, buyers with good credit may want to look for a balance of at least maintaining their score and making wise decisions about improvement wherever they can.
Fix Credit Report Errors
There is only so much people can do about a recent late payment or a collection account. However, late payments or collection accounts that are inaccurate and should not even be on the report are often easier to fix. Once a year, everyone should strongly consider getting a free copy of their credit reports from the three reporting agencies: TransUnion, Equifax, and Experian. Reading carefully through the report may uncover a few mistakes. With this information, future home buyers can dispute the errors. This process should be done well before buying a home as it may take a few months for the corrections to show up on the current report.
Keep Accounts Current
As people review their credit reports, it may be tempting to cancel old credit cards or accounts that are still open but have no balance. That old department store card from ten years ago may feel like clutter on the credit report, but lenders may not see it that way. A good portion of a person's creditworthiness is tied to their credit history. This is, in part, why younger applicants may struggle to reach a high credit score.
Do not close out older lines of credit. Canceling old but current accounts could make a person's credit history appear much shorter and therefore riskier. It is typically considered best for people who want to buy a home to keep all existing accounts open and make sure each payment is on time.
Limit Credit Utilization
Although every part of a person's credit is important for the mortgage application, there are certain aspects that hold more weight. As an example, 30 percent of a borrower's credit score is weighted on the amount they owe. For the credit reporting bureaus, the way people use credit is a significant indicator of their creditworthiness. Having high debts in relation to available credit will typically make the score go down. For example, someone who owes $4,000 on a card with a $5,000 limit has an 80 percent credit utilization rate. Another person who owes $1,000 with a similar limit has a credit utilization rate of 20 percent. Lower credit utilization usually means a higher credit score.
Some people try to “game the system” by applying for new credit cards and then doing a balance transfer. This could be a risky choice for those who want to buy a home within a year or two. The approach can decrease a person's credit utilization, which may increase their credit scores. However, such short-term gains may not last. It could make the situation too easy for people to run up the old card with a lot more debt. In addition, new accounts may reduce a buyer's credit score by reducing their average credit age and placing a new inquiry on the buyer's credit report.
Avoid Opening New Lines of Credit Before the Mortgage Application
Getting a mortgage to buy a home is a big step for most people. Even those who have gone through the process before may not always make the best choices for their credit leading up to their purchase. Lenders look for signs that an applicant with a generally steady report is about to change the way they do things. New accounts are a good example. When a person has a variety of new accounts on their record, lenders may wonder if they are going through financial trouble, or are planning to take on other debt after they buy a home. One of our past clients who made the move to Charlotte purchased a new car thinking the lender wouldn't see it on his report. The new line of credit caused his credit score to drop significantly. Luckily, the lender was able to work around it. This is true even for circumstances related to home buying, like a new account to buy furniture or pay for home improvement projects. Lenders often prefer that borrowers have no new accounts within the past year.
Improving credit in advance of buying a home is best begun early. With these tips, interested home buyers can work to benefit from the boost in their credit before they apply for a mortgage.
Hi there! My name is Ryan Fitzgerald, and I am a REALTOR in Charlotte, NC. My goal is to help you learn more about real estate through our Charlotte Real Estate Blog! Hopefully, you enjoyed the above blog post and it found a way to provide help or value to you. When you're ready to buy or sell a home of your own let us know here. Please feel free to join the conversation by dropping us a comment below... We love comments!