You’re ready to buy a home, but is your credit history prepared, too? For first-time homebuyers, McGuinn Hybrid Homes has tips to improve your credit score.
Your FICO score (aka, credit score) is used by about 90% of lenders to determine whether you are qualified for a home loan and, if so, what rate you can get. The better your score, the lower the interest rate, so this 3-digit number requires your attention.
The basics of credit scores
Let’s start with how credit scores work. When you have a debt—credit card, car loan, student loan, for example—the company you owe reports the amount and date of the debt or balance to credit reporting agencies. The 3 major ones are Equifax, Experian, and TransUnion. The creditors might report to any or all of them. Your history shows payments made on time and late, and you get down-graded for late or missed payments.
Your credit report will also show your total debt and available credit. Lenders check your debt-to-income ratio. They’re looking to see if you already have more debt than your income can handle.
You may qualify for a home loan with a credit score of 500, but if you create a strategy and spend some time getting that number closer to 720, you’ll have more options for buying the home you want.
Tip #1. Reduce your debt.
It’s a lot harder to increase your income than to decrease how much you owe. To improve your creditworthiness, cut back on your spending and use the savings to pay down your balances. Your report will show you don’t owe more than you can handle and you’ll gain a better debt-to-income ratio.
Tip #2. Pay on time.
Every late payment counts against you. If you can’t make a payment on time, contact the creditor to see if you can get the deadline extended. In some cases, you can schedule a future payment right on the phone with the credit representative and avoid the negative report to the credit bureaus.
If you miss payments because you forget when they’re due, sit down and schedule all your payments at once. You can change the payment dates as needed, but this monthly task will keep you on track. Some companies will even give you a better rate if you sign up for auto-pay.
Tip #3. Be careful about applying for credit.
Don’t be tempted by all of those offers you receive! They often come with a low introductory rate, only to soar to a drastically higher interest rate after a few months or a year.
Applying for credit can lower your credit score, particularly when you open a store credit card (as opposed to a bank card). Quite often, when a lender pulls your credit report to decide on your eligibility, your score drops a few points. The more you apply for credit, the lower your score can go.
Tip #4. Don’t cancel credit cards.
Once you’ve paid off a credit card, don’t cancel it. The available credit is a plus for you and stretches your debt-to-income ratio (and that’s a good thing).
Tip #5. Talk to a mortgage lender.
When your plan is to buy a home in the foreseeable future, a conversation with a home mortgage professional is a great start. The lender can look at your report and offer suggestions for improving your mortgage qualifications. You might also discover that you’re in better shape than you imagined.
When you’re ready to start shopping for a new home, the lender will provide a pre-approval letter. This document tells sellers that you are credit-qualified up to a specific amount. Always include a copy when you submit an offer, so that the seller knows you’re a serious buyer with the ability to back-up your offer with the ability to purchase the home.
The conversation with your lender will also enlighten you to the variety of available mortgage programs. An FHA loan, for example, requires only 3.5% down payment for buyers with a minimum credit score of 580. If your FICO is between 500 and 579, you might still qualify for the FHA home loan program with a 10% down payment.
McGuinn Hybrid Homes builds energy-efficient, single-family homes in the Columbia, SC, area—in communities and on property owned by our homebuyers. With so many locations, including lakefront property, take a look at the choices. Talk with Carter Weston at Southern First for more advice on financing your new home. We hope that your first home will be a McGuinn Hybrid Home.