As a prospective first-time home buyer, you’ll likely soon find there’s a lot to manage – like mortgage contracts, down payments, home inspections, offers and counter-offers. Before that even begins, though, you’ll need to make sure that your credit is in a good place. Having a good credit score not only makes it more likely that you’ll be approved for your first mortgage, but it can reduce your interest rate and your monthly mortgage payments as well. Improving your credit health may be a long-term process, so the sooner you get started, the better.
Review Your Credit Reports
About a quarter of all hopeful homeowners who get declined for their mortgage have inaccuracies on their credit reports that could have been corrected had they known about them. Check your free credit report and review it carefully for any inaccuracies – ideally a year before you plan to apply for a mortgage.
Pay More Than the Minimums
If you had late payments or missed payments on your credit report, make sure this is something that doesn’t happen again. For your credit cards and other revolving credit sources, make sure you pay more than the minimum required each month, and try to pay them off in full if you can. This may make you more attractive to mortgage lenders, while reducing the amount of interest you will have to pay.
Reduce Your Debt Balances
Review your credit card statements and make a plan to reduce your balances. Ideally, you shouldn’t use more than 30 percent of your available credit, but even reducing it to 50 percent can help a lot. This can improve your mortgage eligibility, resulting in potentially lower mortgage rates. Avoid the temptation to move debt from one card to another. Not only are you likely to pay extra fees from the credit card companies, it won’t reduce the debt utilization ratio used to calculate your credit score.
Avoid New Loans
Everyone has a maximum amount of money they can safely borrow at any time. This amount is based on things like your income, assets and what you currently owe. Taking on new debts is the last thing you should do when you’re getting ready to buy your first house. If you can, avoid making any unnecessary purchases on your credit cards. If you can’t resist using a credit card, put it in a safe place at home where you won’t be tempted to use it, but don’t close the account before applying for a mortgage. Mortgage lenders don’t like to see any drastic changes on your credit report, including new loans or closed accounts.
Whenever you’re tempted to take out a loan or make a major purchase, try to remember that this could affect your ability to get a mortgage with an acceptable interest rate. For example, if you bought a new car on credit, you may find you’re no longer eligible for the mortgage you planned on, until you’ve paid back some of that car loan. If you are approved for that mortgage, you may find the interest rates are higher than you expected. The time it takes to find a mortgage with better rates, or come up with a higher down payment to offset the additional cost, could delay the closing date on your purchase, which in turn would push back the date you can move into your new home. If buying a new home is important to you, consider keeping your old car for a while longer, skipping that expensive vacation, and even brown-bagging your lunch until you have your debts paid down and have saved enough for your down payment.
Any recommendations or analysis preformed or provided on the Web site is not intended to represent financial advice or guarantee future results. Prior to making any investment or financing decisions, please consult a qualified attorney or financial advisor.
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