Your Credit Score and Buying a House
Understanding Your Credit Score
Take a close look at your credit score before you begin your search to buy a house. Are you a first-time homebuyer? Maybe you are looking to purchase up or to downsize. Your credit score and buying a house go hand in hand. You should have a basic understanding of your credit report before you begin your search. It can save a lot of frustration. This is such an important step in the process.
Importance of Credit History
Your credit history is one of the principal measures a lender uses to determine your interest rate and your ability to purchase a home. The better your credit, the better lending terms your bank or lending institution will be able to offer you. A higher interest rate translates into a higher monthly mortgage payment and/or less buying power, so good credit helps. However, if your credit is poor, there may still be options. Buying a home with bad credit can be possible but may take a little time and some extra work on credit repair. Your credit score will directly affect how much money you can borrow and, ultimately what home you can purchase.
Information on Your Credit Report
You should be aware of what information is on your credit report. You should obtain and review copies of your credit report from the three main credit reporting agencies. The three credit reporting agencies are Experian, Equifax, and TransUnion. You want to be sure that there isn’t any derogatory information on your report. Make sure the information on your credit report is correct, including your personal data. All reporting bureaus have a dispute center where you can work to correct inaccurate data.
What is Debt to Income Ratio? How Does This Affect Your Credit Score and Buying a House?
Debt to income ratio (often abbreviated to DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. Improving your debt-to-income ratio will help you qualify for better lending terms, so keep that in mind before you speak with a lender. If possible, pay off car loans or credit card balances before you seek financing to buy a new home. You should also not obtain new credit right before purchasing a home. You want to lower your debt, not increase it. In most situations, there should be no new car, no shopping spree on a credit card, and no new credit cards obtained just before purchasing a new home. Preferential financing terms that you could receive due to lower debt-to-income ratios, may save you thousands of dollars over the life of your mortgage.
Be Prepared Before Applying for a Mortgage
Prepare yourself and do a deep dive into your credit scores. Experian.com is a great place to start. You can sign up to receive reports from all three bureaus here. You can also sign up for alerts on your credit to monitor changes in information or score alerts. Need help with understanding more about how to do this, give us a call!
