The Home-Buying Process, Part 2
Editor’s note: This is Part 2 of a 3-part series on the home-buying process. Part 3 will focus on a loan pre-approval and the rest of the home-buying process.
Oh, that Ghost of Credit Past! He can come back to haunt you during the home-buying process! He can also help you. Even if you are years from buying a home, your credit score is taking shape today. Don’t panic but yes, there will be a test after this. Your score will become your “credit score,” and it will follow you for the rest of your life.
A credit score is a number many lenders use to determine the likelihood that you will pay back the money you borrow. That might be an oversimplification, but that’s what it boils down to. How much can you afford to borrow and pay back? More importantly, how likely are you to do that based on your past performance?
Your credit score is a crucial factor many lenders consider when deciding whether or not to lend you money. The higher your score, the lower risk you are to a lender. It is not the only factor.
Scores range from 300 to 850. The higher your score, the better your chances of getting a loan. Some companies are willing to lend to higher-risk borrowers, but those borrowers pay a price (usually through higher interest rates). Conventional home loans require a credit score of 620 or higher. There are many loan programs that can work with lower scores, but there are added expenses and restrictions for high-risk buyers.
Do you know where you are on the scale?
- 800 to 850: Excellent. Individuals in this range are considered to be low-risk borrowers.
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 669: Fair
- 300 to 579: Poor
The score is a mathematical sequence made up of multiple factors. These credit scoring models include:
- your payment history
- your current unpaid debt
- the number and type of loans you have
- the ages of your accounts
- the amount of credit you are using compared to the amount of credit you have
- how many times you apply for credit
- public records that indicate
- collections
- foreclosures
- bankruptcies
- judgments
- liens
You can directly impact your credit score
A good credit score is a valuable asset. Tend it like you watch your bank account numbers change. People with high credit scores are low-risk borrowers, so they pay lower interest rates than high-risk lenders. Lenders are most commonly associated with credit scores but employers and others use them too as a measure of character.
First: You need credit to have a credit score.
Some people prefer cash-only living. That is one sure way to avoid debt if your cash flow is steady and strong (and you live within your means). Unfortunately, if a situation does require you to borrow money, you might not be able to get it. Lenders want to know you are capable of using credit responsibly and consistently.
Apply for a credit card, and find a landlord who reports to a credit bureau. Buy a car on credit, and ask if your utility companies report to credit bureaus. It is important to establish a solid credit history.
Second: Understand lender agreements and honor them.
If you have a credit card, use it on a regular basis. Make payments on time. It’s best to carry a balance of around 30%.
Third: Don’t close revolving credit accounts when they are paid.
The age of your credit history is a factor in your credit score. So is available credit. Leave those accounts open, use them from time to time, and it will bolster your credit.
These are just a few of the ways you can improve and maintain your credit score.
There are businesses that specialize in credit repair. Check reviews and research a company’s reputation before hiring one.
Get a free copy of your credit report
FICO is one of the most popular scoring systems used by mortgage lenders today. You are entitled to a free copy of your credit report annually. Following are links to the top three reporting agencies in the United States. Borrowing money to buy a home is one of the most important financial decisions you will make. Start building or restoring your credit profile now.
Do you want to chat about your ability to get a home loan? Give me a call. I’ve got some great resources and would love to share them with you: 801-673-3333
