Before you type into Google, “homes for sale,” you should be taking a deep look at your credit report. We get it. It’s not the glamorous side of buying a new home but knowing how the credit bureaus rate your creditworthiness will save you time and reduce stress when you start viewing homes.
How Credit Scores Impact Your Mortgage
The majority of home buyers do not have the funds to purchase a home outright and need a loan to cover the costs. Because you are applying for a loan, your bank or lender will make a ‘hard inquiry’ on your credit to see how well you have managed your past credit.
The lender will pre-approve you for the mortgage loan amount and interest rate using your credit score and current income status. In most cases, the higher your credit score, the more lending options you’ll have, and the more likely you’ll be able to obtain a better interest rate.
If you have never accessed your credit score (gasp!), you can access your free credit report with no impact on your score through TransUnion or Equifax or your online banking platform. After you review the number and you think it’s too low to qualify for a mortgage, you’ll need to work on raising your credit score.
How To Improve Your Credit Score
Think back to when you got your first credit card. Did you overspend, miss payments, or just skip payments altogether? While you may be a credit management boss now, that history may still linger for up to seven years on your credit report. But, don’t panic. Taking positive actions on your credit can outweigh the previous negative ones.
Talk to a Broker
Even if you’re not looking for a home right now, talking with a mortgage broker (like us!) is the best place to start. Our goal is to help give you the information and tools you need to set you up for financial success. The best part? Working with a broker is a no-cost service!
Maintain Older Credit Accounts
Retailers have made it very easy to purchase large items such as furniture or appliances through in-store credit card programs. However, just like any credit card, make sure you are paying the balance down and not skipping payments. If the balance is at zero, KEEP the card and use it occasionally. This demonstrates to creditors you are responsible for paying down your balance and can be a great way to build a healthy credit history.
Debt Consolidation to Reduce Your Credit Score
Many lenders want to see you maintain your credit balance at 35 percent of your credit limit but, if you’re stretched over that amount debt consolidation can be a great option. By combining your outstanding debts into one monthly payment this loan takes a headache out of managing multiple interest rates and payment deadlines.
Debt consolidation can have an initial negative impact on your credit score as the lender needs to apply for credit. If you have a lower credit score, the terms of your loan such as interest rate and length of the loan may also be impacted. It is important to talk to your broker about what options are right for you to increase your score and help move you into the house and life you want.