How does my credit rating relate to buying a home?
When you apply for a mortgage loan, mortgage lenders look at several different factors, such as:
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• What is your debt-to-income ratio?
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• What is your credit score and credit history?
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• What is your employment history?
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• What’s the worth of your total assets?
When buying a home, having a higher credit score will help you:
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• Qualify for a loan
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• Qualify for better interest rates
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• Lower any potential mortgage insurance (MI).
What is my credit score and how is it calculated?
Your credit report is an ongoing record of your credit card loans, payment history, your credit utilization ratios, the length of your credit history. These are collected by the three credit bureaus (Transunion, Experian, and Equifax). Each credit bureau can then share your credit score with financial institutions, lenders, credit card companies, and other entities to help them make informed decisions when you apply for certain financing options. You might even be asked to validate your credit score when buying a new cell phone or computer. Most lenders use your FICO credit score to determine your eligibility for certain loans. The FICO score is the most widely recognized score, scores fall into the following ranges:
Poor: 300-579
Fair: 580-669
Good: 670-739
Very Good: 740-799
Exceptional: 800-850
How can I raise my credit score to buy a house?
FICO looks at the following factors when calculating your credit score:
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• 35% payment history
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• 30% amount owed
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• 15% length of history
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• 10% new credit
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• 10% types of credit used
To raise your score, you’ll need to:
- • Lower your credit card balances to be around 30% utilization. Paying them off completely might actually hurt your credit.
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• Keep all payments current by paying bills by their due date
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• Don’t let debts go to a collection agency, as these will stay on your report for 7 years
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• Minimize your overall debt-owed
If you’re still struggling to get your credit in check, consider working with a credit counselor who can help you plan how to pay off your debt rather than moving it around between various lenders. Keep in mind, building and repairing your credit could take nine months, 12 months, or even a couple of years depending on where you started, how far it’s fallen, and what efforts you’re able to take towards building your credit.
