Qualifying for home loans can be difficult, especially since lenders have strict mortgage applications and never-ending rules. So, what can a first-time home buyer do to improve their chances of living in their dream house? The simple answer is to prepare for the journey to homeownership, and keeping your credit score clean is one step in the right direction. If you’ve found your forever home but your credit score is short of the lender’s requirements, don’t worry because there are ways to tackle this. Below we will discuss why building credit is essential to buying a home and the steps you can take to improve it.
Importance Of Building Credit
It is common for first-time homebuyers to make mistakes, but to avoid any blunder related to your finances, your credit score is significant. These are three main reasons why building your credit matters when purchasing a house:
● Increased Approval - Lenders use credit scores to determine the risks associated with lending you money, which means a high credit score puts you in a low-risk bracket, increasing your chances of having your mortgage approved.
● Better Terms - Maintaining a healthy credit score can qualify you for better loan terms such as flexible repayment options, reduced PMI premiums, and lesser down payment, making your homeownership journey more affordable.
● Low Interest Rates - Good credit scores mean the individual is on top of their finances, which makes them trustworthy and a low-risk borrower. Lenders tend to lower interest rates for high scores, which can significantly offer savings on your mortgage.
What Credit Score is Required To Buy A Home?
A credit or FICO® score may range from 300 at the low end to 850 as it goes higher. While 740 is usually considered a good score, the minimum credit score required for mortgages is 620 for fixed-rate and adjustable-rate loans. However, government-supported engages like FHA loans have lower minimum credit requirements.
Building Credit To Buy A House
While financial apps like SeedFi, Self Credit Builder, Experian Boost, etc., can help you build credit, it takes time and effort. Since most of it concerns your credit history and repayments, it’s wise to start building your credit way before you buy a home. Here are a few ways you can build your credit:
● Get A Credit Card - One of the best and easiest ways to begin a credit history is to get one or more credit cards. Since the average American has up to four credit cards, you can do so and still maintain a solid score. However, for those who struggle with money in general, four credit cards can lead to future debts that drop your credit score, so be careful with how many you can handle.
● Keep Credit Card Inquiries Low - Although you can have multiple credit cards, applying for a bunch at a time will not help your credit score; this is because a credit card application is treated as a straightforward inquiry of your credit report and may even deduct five or more credit points from your score. Lenders will also see you as high-risk if you have multiple credit card inquiries.
● Make Payments On Time - This one shouldn’t come as a surprise, but you have to pay all your bills on time because payment history makes up 35% of your score, and missing even one payment will show in your credit report and slice off your points.
● Keep Balances Low - You want to spend as little money as possible with your credit card’s available limit, but keep the card open and do not cancel it. Experts recommend using up to 30% of your credit limit so credit companies see that you’re wise with your money and not a spendthrift. Plus, using more than negatively impacts your score even if you complete your payments on time.
● Credit Report Review - Always check and review your credit reports because there just might be an error somewhere. Since you’re allowed a free copy of this report annually, take advantage of it and make sure your records are tracked correctly. You never know which error will result in an immediate boost to your credit. Similarly, if you find payments you forgot about, do them too.
Parting Thoughts
While these methods will help boost your credit score, they certainly won’t get it done quickly enough. If you plan to buy a house or build your overall credit, you need to plan.
Ultimately, it’s all about paying your dues on time, managing your finances well, and keeping your debt ratio low.