How To Improve Your Credit Score Before Buying A Home
If you are thinking about buying a home, condo or any other type of real estate, then you should know how your credits score will impact the home buying process. Most people who buy real estate do not have enough money in the bank to purchase a property outright with cash. Instead, most of us need to get a loan (also referred to as a mortgage) from a bank or through a mortgage broker in order the purchase real estate. The cost of a loan, is in part, linked to a person’s credit worthiness. In other words, lenders want to know the likelihood that a person will repay the entire loan on time and to completion. In the United States, a person’s credit worthiness is determined by their credit score, which is also known as a FICO score. Credit scores are designed to measure the credit worthiness of a person and range from a low of 300 to a high of 850. The median FICO score in the U.S. is 723. Lenders use your credit score to estimate how much of a risk exposure they are undertaking by lending money to you. Based on your FICO score, and other factors such as income and debt, lenders determine whether you qualify for a loan or not, and if you do, what your interest rate and credit limit should be. If the loan applicant’s credit score is low, then banks and other lending institutions may refuse credit or charge higher interest rates. Since borrowers with higher credit scores are less likely to default on a loan, lenders offer loans to them at a lower interest rate. So if you are a potential home buyer, then it would do you good to improve your credit score before buying a home or condo. Read on to learn more about how to get a copy of your credit report and steps you can take to improve your credit score. Your credit score is determined and maintained by three separate credit reporting agencies. These are:
1.Equifax: http://www.equifax.com or (800) 685-1111
2.Trans Union: http://www.transunion.com or (800) 888-4213
3.Experian: http://www.experian.com or (888) 397-3742. Not all credit granting institutions (such as credit card companies, mortgage companies, car loan companies) report to all three credit agencies. Therefore, it’s not uncommon for a person’s FICO score to differ from one agency to the next. For this reason, most home loan lenders take the middle score when determining your credit worthiness. Every consumer has a right to obtain a copy of his or her credit report. To do so, simply go to any of the sites noted above and request a credit report that provides data from all the agencies. The credit agencies determine your FICO score using a complicated formula, where information is collected, weighted and aggregated for each of the five categories below. 1.Payment history – 35 percent 2.Total amount owned – 30 percent 3.Length of credit history – 15 percent
4.Type of credit used – 10 percent
5.New credit – 10 percent Let’s take a look at how you can improve your status in each of these categories. PAYMENT HISTORY To improve your payment history, 1. Always pay your bills on time. 2. Change past-due bills into current and stay that way. 3. If there is a problem in paying on time, contact your creditors and work out a payment plan that will preclude them from reporting a late payment. 4. If in debt, contact a reputable credit counselor, to help you manage your finances responsibly. TOTAL AMOUNT OWED 1. Keep your debt-to-credit ratio low by paying off debts. Don’t move it around. 2. If the credit card accounts you don’t use reflect a good credit history, keep them open as they build up your credit availability. LENGTH OF CREDIT HISTORY 1. Your credit history can improve only over time. Avoid opening a lot of new credit accounts rapidly. It is wise to pay off older accounts that you do not use to build up a positive credit rating. TYPES OF CREDIT USED 1. A mixture of account types such as credit cards, retail accounts, installment loans etc usually improves your credit score. 2. But don't open new accounts just to have several accounts, apply only when you really need it. MANAGING NEW CREDIT 1. Keep inquiries on your credit report at a minimum as they affect your credit score. Open as few new accounts as possible and ensure that you make only small purchases and pay on time. FINAL THOUGHTS It’s not uncommon for credit reports to have errors. For example, you may notice a charge on your credit report that you never authorized, or a charge that belongs to someone else. For these reasons, it’s a good idea to get a copy of your credit report every year, review it carefully for errors, and if you find mistakes, diligently follow the dispute resolution process. Buying a home is a big lifetime decision and taking steps to improve your credit score before looking for a home will not only get you a better mortgage rate, but will also make your home buying experience a pleasurable one.