Buying your first home can be an exciting process and one that is full of questions. You might not know what you need to do to prepare for this process and maybe all you have done is save up some money for your down payment. While this is a key part of the buying process, many people are not aware of the importance of their credit to the home buying process. Having the cash on hand to afford a home is sometimes not enough to secure a loan for your purchase.
Mortgage companies and lenders look at your finances and your job stability when they are considering giving you a home loan. However, the most important factor in their determination is actually your credit history. Mortgages are granted using risk-based pricing, which is centered solely on your prior credit history. This means that those with challenged credit might not be able to get a home loan even if they make a good living and have a lot of cash in the bank.
If you want to know about the ways to improve your credit before buying your first home, you need to read on!
Ways To Improve Your Credit Before Buying Your First Home
1. Pay Off Small Debts
One of the best ways that you can improve your credit before applying for your home loan is to pay off small lines of credit or small loans that you have open. Your credit score is impacted by the dollar amount of debt that you are carrying as well as the number of open lines of credit that have balances on them. Even if you only have a few small credit cards with balances on them or a couple of car loans that are almost paid off, you might be impacting your credit score negatively.
If you can afford to pay off some of your smaller debts before you apply for a home loan, you will be much more likely to be approved. Carrying different kinds of credit is good for your credit score, but having too many lines of credit with balances due or a bunch of open installment loans on your file can prevent you from getting a mortgage.
2. Resolve Prior Credit Challenges
Many people are not aware that even a missed payment here or there can greatly impact your overall credit score. You will want to make sure that you resolve any missed payments or issues with charge-offs that are showing on your credit. When you reach out to the company that you owe this money to and catch up on the money that is owed, this will be reported to your credit. While the credit challenges will still be noted on your credit history, they will be marked as resolved.
Issues with prior lines of credit or installment loans that have not been resolved at all impact your credit quite negatively but as soon as they are marked as resolved, your score will come right up. Many people are not aware that making this effort to take care of prior payment issues can actually help their score even years later. This is always an effort that is worth making, and it can be key to the process of securing a home loan.
3. Increase Credit Profile if Necessary
If you do not have much depth in your credit file, you will not be able to get a home loan in most cases. You will need to be able to show that you have been able to manage various kinds of credit before a lender grants you a home loan. This means that you might need to take out a credit card with a low limit or get a small installment loan for something you can easily afford. Making regular payments on these two different kinds of loans can help increase your score and show your creditworthiness as well.
Before you apply for a home loan, make sure that you have been using at least two forms of credit for about a year. This will greatly improve the chances that you will get a home loan the first time you apply. If you really want to apply for a home loan and have a limited credit file, you might also be able to apply with a co-applicant that has a much deeper credit file. This might be a spouse or a family member, but it should always be someone that you trust.
4. Reduce Balances Below 50%
When you are looking at your credit history, you need to be aware that any credit cards with a balance that is 50% or more of the total limit will cause a big dent in your credit score. Managing your credit score requires maintaining the balance between utilization and excessive use. You will need to be sure that none of your credit cards are being used to carry the majority of your debt before you apply for a home loan.
Paying down credit cards with large balances can cause your credit score to jump up quite quickly, and this can make a huge impact on your ability to get a home loan. Utilization of credit, as well as debt-to-income, can make a big difference in your credit score, and you will want to attend to both items before trying to buy a house.
Care For Your Credit Before You Apply For a Home Loan
Taking care of your credit score and credit file are critical items that improve your chances of getting a home loan. You will want to be certain that your credit is in good order before you start house shopping. Having a better credit score will not only improve your chances of getting a home loan, it will also make your loan more affordable and ensure a lower interest rate for your loan. Investing in your credit goes a long way toward making your dream home purchase a reality.