If you’re like most homebuyers, you’ll take out a loan to finance a home purchase. Mortgage lenders can help you achieve your home ownership dreams.
Lenders need to know that you’ll make your payments on time and in full. Your credit score reflects your ability to pay off debt from credit cards and other loans, such as a car loan, in a timely way. It also affects what type of interest rate you get with a mortgage. The rate impacts how much you pay overall during the life of your loan.
Follow these steps to fix your credit to buy a home.
Your financial ratios, or credit utilization, show you how much credit you have available and how much of it you’re actually using. According to Experian, one of the three major consumer credit bureaus, you should aim for a credit utilization ratio of no more than 30%.
For example, if you’re approved to borrow $10,000, keep what you actually borrow below $3,000.
To keep your credit utilization ratio or fix it:
Pay off balances early, but keep credit cards open.
When your credit balance is climbing, use cash for all your purchases until you’ve paid off your balance.
Increase your total credit available to help you build a credit history.
Prospective homebuyers should aim for a FICO score of at least 670, which FICO considers “good.” Your payment history is the most important factor affecting your FICO score, which is the credit score 90% of lenders use, MyFico reports.
Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%
Late payments and paying less than the minimum due on timed payments can negatively impact your credit score. Credit accounts that you’ve responsibly maintained over a length of time can positively impact your credit score
Lenders like to see a variety of credit sources, including credit cards, car loans, and other forms of revolving debt. This demonstrates that you can manage a mix of credit sources and responsibly make payments on what you owe.
Another benefit of having multiple credit accounts is that you increase your total credit available. By paying off what you owe in full, on time, you can lower your overall credit utilization.
One way to diversify your credit is to open a new credit card account. However, as explained more below, opening new accounts just prior to applying for a home loan can raise credit red flags.
If you have a thin credit file with few credit accounts, check out Experian Boost. This free program scans financial data like utility payments and banking history. When calculating your Experian credit score, the company considers that data, which isn’t usually included in most credit checks.
You’ll want a stable credit score and history before applying for a mortgage. Don’t open new credit accounts or close a lot of accounts right before applying for a mortgage.
Applying for a new credit card, auto loan, or other form of credit can result in a “hard inquiry” into your credit history. A hard inquiry can negatively impact your credit score for the short-term. Taking on for new credit before applying for a home loan, can make potential lenders wonder whether you may be experiencing financial difficulties.
Improving your credit score increases your chances of getting a mortgage at a lower interest rate. Taking steps to build or fix your credit history with on-time payments can improve your score.
With a solid credit score and home loan approval, you can confidently shop for a home with Brookfield Residential. We offer a variety of homes, including single-family houses, condos, and duplexes.Contact us to explore Brookfield Residential communities. One of our experienced sales representatives can help you find a new home you’ll love.