However, just because you’ve reached the minimum credit score to borrow a mortgage doesn’t necessarily mean you’ll meet all the other eligibility requirements. And generally, having a higher credit score will help you qualify for a home loan with a lower mortgage rate, so it’s important to work on improving your credit score well in advance of buying a home.
Meanwhile, government-backed mortgages are insured by a federal agency, such as the Federal Housing Administration, the Department of Agriculture or the Department of Veterans Affairs. This government guarantee protects the lender if you default on your mortgage, which translates to less stringent credit score requirements.
Even a small difference in your mortgage rate can translate to thousands of dollars in savings over the life of the loan. On a $250,000 30-year loan with a 6% mortgage rate, you can expect to pay $289,595 in interest charges over the duration of the loan. With a rate increase of just a 0.25 percentage point, you’d pay an extra $14,550 in interest by the time the loan is fully repaid.
- Debt-to-income ratio, which is your total monthly bills divided by your gross monthly income. Having a DTI ratio of 43% or higher may make it more difficult to qualify for a mortgage.
- Loan-to-value ratio, which is the loan amount divided by the house purchase price. If you have a higher down payment, your LTV ratio will be lower, and vice versa.
- Negative credit history, such as defaulted loans, foreclosure or bankruptcy. For example, you need to wait two years after bankruptcy to apply for an FHA loan.
- Liquid assets, such as savings and investment accounts. This is particularly important for jumbo loan borrowers who are buying multi-million-dollar homes.
- Profits and losses, if you own a business. This can help measure your likelihood of repaying a mortgage as a self-employed individual.
How to Prepare Your Credit Score for Buying a Home
If your credit score is holding your back from buying a home, you should start building better credit now. If you have bad credit, it could take months or a year to get your credit in shape to qualify for a mortgage. Here are a few steps to help improve your credit score before applying for a home loan.
1. Check Your Credit Score and Report
Before you can come up with a plan to boost your credit score, you’ll need to find out where you currently stand. Many banks and third-party financial apps let you check your FICO score for free without damaging your credit.
You should also get a copy of your credit report from all three credit bureaus – Equifax, Experian and TransUnion – on www.AnnualCreditReport.com. Your credit report provides an in-depth look into your financial history, including your outstanding debts, total accounts and on-time payment record. If you find errors on your credit report, dispute them with the bureau directly.
2. Find Areas for Improving Your Credit Score
With your credit report and scores in hand, look for areas where you can make improvements before you apply for a mortgage. Here are a few common credit issues and how to resolve them:
Poor on-time payment history: Enroll in automatic payments for credit cards, auto loans and other bills. Additionally, make sure any bills you pay each month (such as rent or buy now, pay later installments) are reported to the credit bureaus.
High credit utilization: Pay down your credit card balances. You can also request a credit line increase, but make sure not to rack up more debt just because your limit is higher.
Low age of credit: Keep older, well-established accounts open. If you have a credit card account that you never use, consider charging it once every few months and paying off the balance to keep it active.
3. Avoid Applying for New Credit While You Shop for a Home
Opening a new account, such as a credit card or auto loan, lowers your average age of credit and results in a hard credit inquiry that can lower your score by a few points. Importantly, applying for new credit after you’ve already been preapproved for a mortgage can pose big issues during the underwriting process.
Source: money.usnews.com ~ By Erika Giovanetti ~ Image: Canva Pro
