Property is one of the biggest purchases you will make in your lifetime. For first-time buyers, it’s important to get your finances in order before house hunting or applying for a mortgage.
Your credit score is essential for securing a mortgage loan and can help you get a lower interest rate. As you prepare to buy a home, learn how to get your credit history ready.
Get Financially Educated
Although lenders consider factors like your debt-to-income ratio and employment status, a good credit score can result in more savings and be the difference between qualifying for an FHA loan or a conventional mortgage.
Those with a lower credit score and less money for a down payment may consider an FHA loan, a government-backed mortgage insured by the Federal Housing Administration. A conventional loan meets the requirements for Fannie Mae or Freddie Mac, the leading sources of mortgage financing in the U.S.
To determine the amount for which you qualify, a lender may ask about your income, other assets, employment history and tax returns.
Check Your Credit Report
Credit reports illustrate how you manage credit, including your payment history and outstanding balances. A lender will look at how you have used credit in the past; the ideal buyer typically has multiple accounts with a long history of on-time payments.
You can obtain a free copy of your credit report from Experian, Equifax and TransUnion once a year to check accounts, balances and activity on each report. Report any discrepancies to the credit bureaus right away, as it can take up to 45 days to be investigated and corrected.
Depending on the error, removing or correcting the issue may improve your score and help you qualify for a lower interest rate.
Address Outstanding Debts
Chances are you have student debt, credit cards, an auto loan – or all three. These open balances influence your credit score and debt-to-income ratio, which should ideally be under 36 percent. Less outstanding debt shows you’re in a better position to afford a mortgage payment, so it’s important to pay down your balances to help boost your credit score.
For credit cards, a higher utilization rate with large outstanding balances could impact your overall credit and lower your score, which affects your eligibility for a loan with a lower interest rate.
Pay Bills on Time
Keep your current financial habits in check as you look to qualify for a mortgage. Make sure all bills are paid on time – this factor accounts for about one-third of your credit history.
While late payments can initially have a sharp impact on your score, their effect lessens with time. Should you have a previously unpaid or delayed bill payment, wait at least six months before applying for a mortgage.
Do Not Close Accounts
You might have an older line of credit that’s no longer in use and think that closing it will help raise your score. Yet by doing so, you lose that available credit which lowers your credit utilization ratio. As such, the percentage of available credit you’re using would jump, a risk to lenders that may influence the loan type, amount and interest rate offered to you.
If you’re in the process of paying down outstanding debts, keep these accounts open during the mortgage qualification phase to help improve your credit score.
Get closer to your dream of becoming a homeowner with help from Ion Bank. To learn more about your loan options, including programs for first-time buyers, contact us today.