If you are thinking of purchasing a home in the coming year, there are several things you should do before you ever step foot into a potential house. One of them is to review and improve your credit to help ensure you receive the most favorable home loan terms. Of course, everyone has their own unique set of circumstances when it comes to finances, but there are some basic guidelines all borrowers can benefit from. Here they are:
Start with Your Score — The first thing you want to do is get a copy of your credit report, which includes your FICO score. You can get your report for free at annualcreditreport.com. Review it thoroughly for any errors or inaccuracies. If you find any, get to work having them corrected; you want lenders making decisions based on your information, not someone else’s. Traditional lenders typically require a credit score of 620 or higher to consider applicants for a loan; FHA loans require a minimum score of 580. However, your score will also affect the interest rate on your mortgage — the higher the score, the lower the rate. So it’s worth it to work on improving your score before you apply.
Pay On Time, Every Time — This is the single most important thing you can do to ensure a good credit score. Having a strong record of on-time payments is essential when applying for a home loan. Even one recent late payment can greatly influence the decision. If you’ve had any issues paying on time in the past, make it impossible to pay late by setting up all your bills up for automatic payments.
Hold Steady with Credit Cards — When you apply for a mortgage, lenders will be looking for consistency and responsibility. So now isn’t the time to open a lot of new accounts. But it’s also not the time to close the ones you have. It’s a great idea to pay down high balances, but even if you pay off one or more cards, don’t close the accounts. Doing so can have a negative effect on your credit utilization ratio (amount of total debt divided by total available credit), which has the potential to lower your score — exactly what you don’t want.
Beware of Quick Fix Credit Repair — If you’re credit score is lower than you’d like, you might be tempted to go for one of the quick fix credit repair solutions. Don’t do it. There is no way to immediately “fix” bad credit. What these companies do is initiate disputes on all negative entries on your credit report. While the creditors look into it, those line items will disappear from the report, which gives the temporary appearance of a cleaner credit record. But, once the creditor determines the entry is valid, it will show back up on your report. You are better off taking the money you’d spend on credit repair and using it to pay down high balances.
Have a Talk with Your Boss — While this won’t directly influence your credit, it can help as you prepare a plan to buy your home. Talk with your manager about what you can expect in the coming year. Are you on track for any bonuses? Will the company be giving salary increases? If so, are you in good standing to get a raise? Having an idea of what is to come financially can help you make better decisions and formulate a solid plan to help you reach your goal of home ownership.
Getting a handle on your credit situation is an important step when considering buying a home. Even if you’ve made financial mistakes in the past, you can still work toward improving your score. It takes time, patience and discipline, but it will be well worth it.