How Your Credit Score Affects Your Ability to Buy a Home

The home-buying process can be one of the most exciting times of your life. Even so, there is a lot you have to do in order to prepare. Whether you are on the fence about purchasing a home or actively looking at lenders, there are some things to consider before you make the leap, such as your credit score. Having good credit can make all the difference when it comes to finding the perfect home.  


What is Considered Good Credit?

According to FICO, the median credit score in 2019 was 706, and anything above that is considered good credit. Additionally, any credit score that is above 740 is considered optimal credit and is what will get you the best rates for a mortgage.

There are three credit reporting companies that report on your credit: Experian, Transunion, and Equifax. These bureaus track loans in your name, credit cards, payments, and outstanding debts.

Having good credit means you have made consistent and on-time payments towards your debts and are not in default. Additionally, there are a variety of scoring models used depending on what you are looking to accomplish.

Scoring models are different when it comes to purchasing a home, a car, home furnishings, or opening a new credit card, so your score may vary depending on which one you are looking to do. Because of this, the score you see on your credit report or a credit reporting app, such as Credit Karma, may be different.

So, how do you improve your credit score? Here are some helpful tips to get you started!


Dispute Credit Report Errors

The Federal Trade Commission advises consumers to check their credit report once a year in order to ensure the accuracy of the information on the report and to help guard against identity theft. Because this information impacts whether or not you can get a mortgage, pulling a credit report before you apply for a mortgage will help you understand the health of your credit. This can also impact your rate if you don’t have an accurate report, which will potentially cost or save you thousands of dollars in interest.

Consumers are able to pull a free credit report once a year with any of the three credit reporting companies, but can also use to get a report of their credit. Once you pull your report, it is very important to look over the report carefully. Finding any errors or mistakes and disputing them with the credit agencies is important and can improve your credit.


Make Consistent Payments

Thirty-five percent of your credit score is based on whether or not you make payments towards your debts, so it is crucial to make consistent payments. One late payment could stay on your record for up to 7 years. So even though it might just be one late payment, this will negatively impact your credit score record for a long time.  Making payments towards debts that are on time is what will ultimately help improve your score.

It does take time and patience to see improvements. While this is a painful process, especially if you are itching to purchase a home in the coming future, making sure you have good credit will give you more options in terms of lender and will ultimately benefit your future. Prioritizing consistent payments, even putting your payments on auto-pay from your bank account, will help you reach a good credit score.


Keep Credit Card Balances as Low as Possible.

Something else to consider is keeping your credit card balances as low as possible, as this makes up another 30 percent of your credit score. Lenders will be looking to see if you keep your credit under 30 percent of your limit.  It may seem tempting to keep charging purchases to your credit card, but when looking to purchase a home, make sure to limit how much you charge to your credit cards.

Even if you need to make payments that are a little higher for a certain amount of time, keeping your credit under 30 percent of your limit will show lenders that you are responsible and take your debts seriously. Credit reporting agencies typically look at your credit when your credit card statement comes out. So even if you pay off your credit card every month, if your credit card statement shows that you have used up a good amount of your credit limit, then that is what the credit agencies will see.


Do Mortgage Pre-approvals Affect Credit Score?

A mistake that a lot of people make during the process of purchasing a home is increasing credit card limits or opening new lines of credit. While seemingly harmless, increasing your credit limit and opening a new line of credit will prompt a hard credit inquiry, which will negatively impact your credit score. It is best to wait until after you purchase your home to do these things so you have a better chance of getting the best rate possible.

Are you interested in learning more about the home buying process? Talk to one of our mortgage experts today!


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