Don’t Let Your Credit Score Stop You from Buying a Home
Anything you think is in your way can be removed if you really want to become a homeowner. In fact, you’ll find out that some commonly perceived roadblocks are only myths, and don’t need to delay your dreams anymore. If you are hesitant about moving forward, our new 5-week series is just for you — The 5 Most Common Myths BUSTED About the Best Time to Buy Your First Home.
Myth: I need a high credit score in order to buy a home.
Truth: There are benefits to having a high credit score when it comes to buying a home, but there are great loan programs and options for people who have less than perfect credit. Plus, you can always work toward improving your score.
If you’re even thinking about buying a home in the coming year, now is the time to start giving your credit score the attention it deserves.
It can be considered your “one ticket” to homeownership and getting a “good” mortgage, but you shouldn’t think of it as a roadblock if your score is lower than you’d like.
You can help bust this myth yourself if you start to understand:
- how your credit score is compiled and viewed for pre-qualification
- how programs and loans are out there to make homeownership possible for those of you with lower scores,
- how to improve (and not hurt!) your score starting today.
Credit Score 101
Your FICO credit score is used to determine how “risky” you are based on your past financial behavior. The credit report is a way to view your credit history to see if your bills are being paid back, and if they are being paid back on time!
Your score is based on information from your credit report, which is kind of like a “report card” on your financial behavior when dealing with credit. It can range from a high of 850 to a low of 300.
Your past payment history and total debt (how much you owe) weigh heavier in its calculation. Your score also takes into consideration how long you’ve had credit, any new credit, and the type of credit.
Remember, a credit score has nothing to do with your income or investments. It’s based on how you’ve handled your credit card payments and other loan payments, like your car or student loan.
It also takes into account if you’ve declared bankruptcy, have a tax lien, or you’re being sought by a collection agency.
Let’s look at credit score ranges and how they are viewed.
680 – 719. Good
It’s Not Over Until It’s Over
For those of you with a lower score than you’d like, don’t give up! The first step is becoming aware of your score and what is on your report. From there, we can give you pointers and recommendations to improve your score.
Even though your credit score is weighed heavily when getting pre-qualified for a mortgage, it is only one piece of the qualification process.
The other factors that will be considered are your income, total cash on hand (checking/savings, investment accounts, etc.), and current monthly debts.
Here are some options that could help round out your own credit-worthiness:
- Prove a year of on-time rent payments to show you’ve been a responsible renter and can handle a mortgage payment.
- Write a letter of explanation for any one-time situations that may have caused your score to drop — such as losing a job in the pandemic, medical illness, or unexpected hospitalization
- Have a good current debt-to-income ratio.
- Make a bigger down payment.
- Have at least 3-6 months of cash reserves in the bank.
- Get a co-signer
- Show you have other assets, such as stocks, bonds, or retirement
Raise Your Score
Even simple actions can help improve (or damage) your score. It’s a step-by-step approach but start working on it today.
If buying a home is a goal of yours, then make a commitment to your credit score and focus on ways you can raise it and avoid ways to lower it.
If you can raise your score from 640 to 720, you may open up more loan options and other terms to make homeownership even more affordable.
Here are some strategies to keep in mind:
•Make payments on time … all the time. No matter if it’s a few dollars or thousands, a late payment will hurt your score. This makes up 35% of your FICO score.
•Ask for a higher credit limit on your cards but maintain a low balance. The credit bureaus want to see that you have available credit you aren’t using. Keep your debt-to-credit ratio at 30% or better. This ratio makes up 30% of your entire credit score.
•Never make major purchases during the time of your loan process. You have total control over this! Additional monthly recurring debt can impact how much you can borrow.
•Think twice before canceling a long-standing credit card. A credit card that you’ve had a long time since shows you’ve built a positive account record over the years.
• Negotiate with creditors to make a “good-will adjustment.” If you’ve been a good customer in the past and then had one or two late payments because of unemployment or other circumstances, such as the COVID pandemic they may offer a courtesy removal of the late payment.
•Look out for errors or anything suspicious on your credit report. If you see anything that’s not right or questionable, contact the credit bureaus to correct it versus disputing it. It’s important to monitor your report regularly especially if you plan to buy a home in the coming year.
•Pay off “trivial fines” such as parking tickets and even library fines. You don’t want these to get turned over to a collections agency. Don’t let these small fees add up and hurt you.
It is common to have something reporting incorrectly on your credit report, so I recommend getting in the habit of reviewing your report from one of the 3 credit bureau’s once every 4 months. You can get a free copy once per year from Equifax, TransUnion, and Experian at www.annualcreditreport.com
Here is the contact information from each credit bureau for correcting any errors on your report:
• Experian www.experian.com (800)‐333‐4930
• TransUnion www.transunion.com (800) 888-4213
• Equifax www.equifax.com (800) 685-1111
Let me know if you have any questions about your credit score. Next week in this series, we’ll bust the myth that waiting to buy is better for some of you — Renting vs Buying – Your Break Even Point Is Sooner Than You Think.
I'm Jordan and I love helping first time home buyers make their first home more affordable and stress-free! It all starts with your personal budget and how much you can comfortably afford. Let me know how I can help you make your real estate dreams come true.
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