Your credit score is the silent résumé you’ve been building throughout your financial life. Serving as a record of your habits, good and bad, your score gives lenders an indication of your reliability.
Although a home provides the lender collateral should you default on your loan, they want to further protect their interests. Lending to borrowers with low scores is a risk they don’t want to take. And if they do offer you a loan, you could be faced with a less than favorable interest rate and higher payments.
Before you set up home listing alerts, focus on the actions you need to take as a potential home buyer. Review your budget to determine what mortgage payment, escrow allowance, and maintenance costs you can afford.
Once you’ve arrived at your number, calculate the total home cost, estimated down payment, and review loan options and rates. Federal Housing Administration and conventional loans have different terms and requirements, including what credit score is needed. Review the parameters for your target loan, and then you can begin building your credit toward that goal.
1. Be Smart About Your Credit Lines
If home buying is in your near future, think twice before requesting new credit. Applications for a new credit account for 10% of your FICO score. While 10% may not seem like much, it makes a difference when you plan to shop for a loan. Repeated inquiries for new credit may appear as a negative to lenders, potentially signaling that you’re a risky bet.
Be smart and plan your new credit cards based on when you hope to buy a home. Aim to manage and build your credit by paying your bills on time and building a long history of reliability.
If you don’t have much credit history, consider applying for a secured credit card, which doesn’t require a credit check. You’ll build credit while making everyday transactions, which will feed into your overall credit score.
2. Know Your Score and How It Got There
Credit scores change as new data from lenders is fed to the credit reporting bureaus each month. Get a snapshot of where you stand now by pulling your credit score and report. Generally available through one of the bureaus — Experian, TransUnion, and Equifax — your score may vary between them.
Review your credit report, which includes monthly payment history, balances, and delinquencies from your entire credit life. If anything is incorrect, submit a dispute with both the reporting creditor and the credit bureau to ensure accuracy.
Once you’ve ensured that the information is accurate, see what factors are improving or reducing your score. Most lenders require a credit score of 620 or higher for a conventional mortgage.
However, scores of 670 or higher get you into the good range, which can help you qualify for better rates. Your interest rate is important for your overall investment in your home. With most loans, the majority of your payments will go toward interest before reducing your principal.
3. Review Your Payment and Variable Credit Use Habits
The two biggest factors making up your score are ones that you likely touch daily: payment history and credit utilization. Paying your bills on time is a requirement for financial stewardship, even if you don’t buy a home. On-time payments reflect your commitment to follow through on your promise of repayment, which lenders see as a priority indicator.
Your payment habits drive 35% of your credit score, meaning that a history of missed payments can easily slash your score. Eliminate bad habits now to show improvement, but realize that your prior history may impact your future credit approval success.
Variable credit use, or credit utilization, shows potential lenders how responsible you are with access to credit. Using near or up to the limit of your available credit may indicate that you struggle with money management. This red flag may make lenders wary about entrusting you with a six-figure, 30-year commitment.
Aim to keep your utilization under 30%, as your usage drives 30% of your score. Pay down balances owed, make multiple payments a month to keep your utilization low, and review your budget for savings.
Establishing Your Home-Buying Timeline
Finding a home you love is often the most exciting part of the search. However, smart borrowers pause and lay the groundwork now so they can truly enjoy their new abode. Consider your current reality and determine when home buying makes the most sense.
Your job, relationship, family plans, and financial situation all combine to what is your unique timeline for homeownership. Be realistic now so you can avoid disappointment or financial disaster later.
Account for all of the factors that make up your idea of homeownership. If you’re dreaming of a cozy cottage, consider the time commitment and maintenance costs of older homes with lush landscaping. Incorporate those costs — and your ability to cover them — into your budget and timeline.
Once you’ve set a target for when to buy your first home, create a plan to improve your finances. Identify the credit score you’re working toward and adjust your habits to fuel its growth. Before you know it, you’ll be in your new home and building the life that you dreamed of.