If buying a home is in your future, one of the first things you should do is check your credit score. Even if you’re still saving for a down payment, the sooner you know your score, the better. You can get your score by requesting a credit report from one of the three major credit reporting companies: Equifax, Experian, and TransUnion. Federal law requires these companies to offer you a free credit report once per year, so take advantage of this benefit.
After you get your report, thoroughly check for any errors or inaccuracies. Are the addresses, accounts, and balances accurate? Are there accounts you don’t recognize? If you find a mistake, contact the credit reporting company and file a dispute. You want to make sure your credit report is completely accurate before you start house shopping.
What Credit Score Do You Need?
Once you know your credit score, this will help you understand how it will impact the type of mortgage you might be able to qualify for. Conventional loans typically require your credit score to be at least 620. If your credit score is less than that, then you will likely want to look into a Federal Housing Administration (FHA) loan. If you have a credit score of 580 or over and a 3.5 percent down payment, you may qualify for an FHA loan. Finally, if you have a score of 500 to 579, then you will need at least a 10 percent down payment for an FHA loan.
That said, the closer you are to an 850 FICO score, the better your chances of qualifying for a loan, and the better interest rate you are likely to get.
Steps to Improve Your Score
According to FICO, the scoring system used by the majority of banks, the following are key to having the best possible credit score:
1. Pay Your Bills on Time
Your payment history is the most important factor for determining your score. If you have a tendency to be forgetful, consider setting up your bills on automatic payment.
2. Keep Your Credit Card Balances Low
This is the next most important factor in your credit score, so do what you can to keep your debt as low as possible and pay off what you can.
3. Open Credit Only When You Need It
The older the age of your open credit card accounts the better it is for your credit.
Improving your credit score takes time, so be wary of any services that claim to be able to fix your credit overnight. If you want to learn more, the FICO company offers a variety of credit resources, including information on how to understand your report and how to improve your score.
Now that you have a good idea about your credit score, you're ready to take these next steps in order to buy your dream home.
What Finance Steps Do You Need to Take Next?
Before you start looking for your new home, you need to take a few key steps with your finances to make the process as smooth and painless as possible. Once you take care of your finances THEN you can start looking at homes and contact a real estate agent.
1. Getting Your Finances in Order
- Know your credit history and fix any issues that might keep you from getting a loan.
- Calculate your debt and expenses to help determine your desired monthly mortgage payment.
2. Looking for a Lender
- Once you have your finances in order and you have an idea of what you can afford, gather all the necessary financial documents and start looking for a lender.
- Find a reputable lender who listens to your needs. A good loan officer can make or break your experience.
3. Getting Pre-approved
- Now that you have your finances in good order and have found a lender, the next important step is to get a pre-approval letter from your lender to prove your buying potential.
You’re ready to start looking for a home. In addition to knowing just how much you can afford and the type of home you want, make sure you take into consideration different neighborhoods, schools, and other important variables like commute times, parks and recreation opportunities, and shopping.
