Share This Article
Each potential home buyer dreams of the day they’ll finally get the symbol of independence, security, and prosperity: the key to the front door of their new home. Before you get that one, though, there’s another key you need to craft. Your credit score, a numerical representation of your credit history, will determine a lot about your housing situation - from how much house you can afford to the interest rate you’ll have.
Your credit score is determined by three different credit monitoring agencies: TransUnion, Equifax, and Experian. Each has its own method for calculating your score, so your number may not be the same with each agency. Paying debts off, making payments on time, and not using all of your available credit will increase your score. Missing payments, opening many credit accounts, or carrying a significant amount of debt from month-to-month will decrease your score.
Less important than the actual score is your score grouping. Lenders tend to lump borrowers into four categories: sub-prime, near-prime, prime and super-prime. Different lenders break these categories down at different score points, but the terminology and treatment are fairly universal. Super-prime lenders get the lowest rates because they represent the lowest level of risk for the lender. Sub-prime and near-prime borrowers will have a lower cap for the size of the loan they can take and will generally pay a higher interest rate.
If you’re working on raising a low credit score, a good target number is 640. This should put you in the prime group and ensure you don’t have to pay extra on your mortgage. If you’re building good credit, 740 is generally the lowest super-prime score, and you may qualify for some of the best rates and terms available.
If you’re going house-hunting in the next year, there are three steps you can take right now to improve the terms of your mortgage.
Check your credit score
You can check your credit report for free once a year at annualcreditreport.com; however, there is a fee to receive your actual score. Other sources provide credit reports, but many of them will charge you.
Review your credit report for errors and inaccuracies. Look for accounts you don’t recognize or balances that are not up-to-date. You may even catch an identity thief red-handed! The report comes with instructions for challenging any item. In most cases, you can leave a note for lenders in the file explaining the item under dispute.
Boost your credit score!
There are no simple tricks to bump your credit score in advance of a mortgage. You need to develop a 6- to 12-month plan to boost your credit score before getting your mortgage by making sound financial decisions. Demonstrate to lenders that you can use credit responsibly and your score will increase.
Take care not to make any major purchases using credit or a loan right before you apply for a mortgage. Even if you’re expecting a major windfall, such as an overtime check or a tax refund, creditors don’t see that on your report. Hold off until you have the cash in hand before you splurge on a car or other large expense.
If a lack of credit history is hurting your score, many lenders offer “credit builder” loans. These involve borrowing a small amount of money and making regular installment payments on it. Parents can frequently take out these loans on behalf of children to help them build a stronger credit history.
If your credit score is low and there’s nothing you can do about it, you may need to take other steps to get a better position on a loan. You might try boosting your down payment or shopping for less expensive houses so you’re borrowing a smaller sum of money. A co-signer, another responsible party willing to take on the risk of the loan, can also improve your terms.
If your debt is a serious problem, perhaps moving into a new house isn’t a good short-term priority. Focus instead on paying off debt and saving up for a down payment. This can keep you from getting stuck with a house payment you can’t afford before you’re ready for it.