Buying a home is one of the most rewarding experiences. Here are a few things to keep in mind as you start the journey to home ownership.
Check Your Credit Score
It’s always a good idea to know where your credit stands. Your credit score will be a big determiner of the interest rate you are offered by your lender and will help determine the amount they will lend to you. There are several websites you can use to check your credit score, here are a few: TransUnion, Equifax, Experian. You can check your own score up to once a day without effecting your credit which is known as a soft inquiry. When a financial institution checks your score because you have applied for a loan or other types of credit it’s called a hard inquiry. Hard inquiries can lower your credit score and should be kept to a minimum.
Improve Your Credit Score
If your score is a bit low, there are things you can do to help raise it. Here are a few tips to help you:
- Obtain and Closely Review Your Free Credit Report: In order to improve your credit score, you first need to know what information is on your credit report. The Fair Credit Reporting Act (FCRA) gives you the option to obtain a free credit report from each of the three nationwide consumer reporting companies once every twelve months. Your credit report contains information including your current and past residences, how you pay your bills, bankruptcies, foreclosures and more. Obtaining and understanding the information on your credit report will help you know what you may need to address in order to improve your credit score.
- Use a Credit Report Repair Company to Dispute Errors: Your credit history is 35 percent of your FICO score, and according to a 2013 study by the Federal Trade Commission (FTC), more than 40 million Americans have something that is incorrect on their credit report. While a late payment or derogatory mark from a creditor may seem harmless, it can have long-standing consequences, in some instances staying on your report for seven years. If you have errors on your credit report, consider working with a credit repair company, who can navigate the complexities of credit repair, contact the credit bureaus on your behalf and help remove any errors as quickly as possible.
- Spread Credit Card Debt Across Multiple Cards: If any of your credit cards are close to the maximum utilization point, it will be a red flag to lenders, who see this as an indication that you could be having financial issues. If you have multiple cards, spreading the balance out between them could make sense. For example, instead of having one card that is 90 percent maxed out while two other cards have a zero balance, having a 30 percent balance on each card can help your credit score. Reducing overall debt is always the best option, but spreading out your balance can have a positive impact.
Know What You Can Afford
A quick and easy way to know how much house you can afford is to use an affordability calculator. These calculators will not give you a full financial picture but they are a great place to start.
By knowing ahead of time what you can afford in your target area, it will help keep you grounded and focused on what your current needs are instead of what be nice to have.
Start Saving For a Down Payment
How much should you save for a house? Twenty percent down is typical with most mortgage lenders in order to avoid paying for PMI (Private Mortgage Insurance). However, there are other types of home loans, such as a VA loan if you have served in the military and qualify, that may allow you to put down less than twenty percent while avoiding PMIs altogether.
As an added benefit to having a sizable down payment, you may also receive a lower interest rate that will save you tens of thousands of dollars in interest over time. So start saving now!
Don’t Close Old Credit Card Accounts or Apply for New Ones
Closing a credit card account will not raise your credit score. In fact, in some cases, it may actually lower it. Instead, try to pay down the balance as much as you can, while continuing to make your monthly payments on time. If you have an old credit card you never use anymore, just ignore it, or at least don’t close it until after you have purchased your new home.
Opening new credit cards before buying a home is also not a good idea. You don’t want creditors checking your credit or opening new cards under your name, as you may lose some points on your credit score.
The absolute worst thing you can do is max out one of your credit cards, even if the limit on the card is low. If you do, your credit score may plummet. Try tackling your credit cards by paying on the ones with the highest interest rate first, then as one gets paid off, focus on the next card until you’re free and clear.
There are many more things to consider when buying a home which we will be covering in future post. For now, if you have any questions please feel free to call us at 816-668-6261 or shoot us a email.