Loans can be confusing, but they can also be a great benefit to home buying. A good credit score increases the likelihood of qualifying for a mortgage as it indicates to the lender that you are more likely to make timely payments on your loan. Even better, a solid credit score gives you, the potential borrower, a better chance of a lower interest rate. This could result in savings of thousands of dollars over the life of the loan.
However, if you find that your creditworthiness is more of a barrier than an asset to your home buying efforts, or you are unsure of where you are with your credit health, never fear. There are methods to improve and maintain your credit as you turn your mind to buying a home.
Make timely payments
You cannot get a good credit score without establishing credit first. This can be done by obtaining a loan or a line of credit such as a credit card. If you want to improve your credit score, first show that you are managing your credit score wisely. Use it to make responsible purchases and pay bills on time every time. If you’ve made late payments in the past, try to make payments on time in the future.
You can track late payments by checking your credit report. There are many tools online that will allow you to view your credit report once a year without affecting your credit score. Make use of these tools and make sure that all of your debt payments are correctly reported. .
Should you discover that a payment has been incorrectly reported as late, you can dispute this with the credit bureau that reported the time of the payment. You can also dispute this directly with the creditor who originally sent the information to the office, following your lender’s instructions for filing the dispute. Keep in mind that if you dispute information in your credit report, the credit bureau or lender typically has 30 days to investigate the claim and may request additional information from you to support your claim.
Strategically diversify your credit
Opening a new account can help you build up your bankroll. Imagine a new credit card or take on installment debt – a loan that the borrower repays in regular installments. This is commonly known as the “credit mix” and shows that you can manage multiple types of credit. Using your credit mix wisely can help improve your credit score. However, be careful about opening new lines of credit when you are near or already in a home purchase.
“If you are in the process of buying a home, this should be your only loan
Acquisitions, ”said John Ulzheimer, a former insider and author of the credit bureau, whose books include credit The Smart Consumer’s Guide to Good Credit. According to Ulzheimer, a home loan applicant can influence a lender’s evaluation of an application by taking on large debts just before applying for a mortgage loan.
Also, if you’re in the process of being checked for a home loan, it isn’t time to upset your credit picture by making a major credit purchase. Entering into new debt could affect the likelihood of approval.
Don’t turn it off
Don’t shut down your sources of credit – like canceling a credit card – just to prove you don’t need them. This can reduce your overall available credit. It may be better for your credit profile to keep these accounts open and unused, or to use them only slightly if you pay on time.
“You are better off using that credit card to make a small payment at the grocery store and then pay it off at the end of the month,” said Marc Souza, Citi Area’s Lending Manager.
You can also use this card to cover small subscription services. Just make sure that the balance on the card is set to automatically pay out monthly. This will preserve your available loan amount and reduce the risk of an account being closed due to inactivity.
Take a look at your student loans
While student loans can affect your credit score, it isn’t always negative. Proof that you can pay a certain amount over a period of time shows a solid track record. If you have any questions about your loan, don’t hesitate to consult an expert.
Be sure to have these conversations with a credit professional before taking action, whether you are considering consolidating student debt or forbearance. Creditors can help you develop the best credit management strategy. Because some loan programs analyze student debt differently than a credit card or car loan, experts can help you prioritize for improving your credit.
In addition to your creditworthiness, think about other important elements
When a lender is preparing to loan you a mortgage, your creditworthiness is a measure of their reliability. The higher the score, the more trustworthy you appear. A higher score can also qualify you for lower mortgage rates. While your score is an important component, it’s not the only one.
Lenders will also check your income, employment history, and ability to take the new payment. Also important is the loan to value ratio, which is where lenders look at the estimated home value versus the loan amount.
Improve your DTI ratio
Your debt to income ratio, or the amount of your gross monthly income used for your monthly debt, will affect your ability to take out a mortgage. In the eyes of a lender, the lower the DTI, the more likely you will be able to pay. If you incur new costs during the evaluation period, these will be calculated in your DTI. Try paying back other loans or lines of credit in full to lower your DTI. Making monthly payments on your debt does not lower your DTI; it just eliminates entire balances. One strategy is to repay a smaller loan in full while making the minimum monthly payments on other debts. Once the smaller loans are gone, use the money you budgeted for them to pay off the larger balances.
Another factor is your available credit – often viewed through the lens of your credit utilization, which is your total debt versus your total credit limit. For example, if you have a total of $ 20,000 on two credit cards and $ 10,000 on one credit card, your credit utilization is 50%. This means that you will be using half of the total available credit. A low credit load is likely to have a positive impact on your credit score.
Don’t make assumptions
If you are intimidated into starting the process because you think your credit score is not high enough, you may be underestimating yourself.
“You should never assume that your credit scores are too low,” said Ulzheimer. He recommends consulting a mortgage lender to see if there are any loan programs that will fit your credit profile, as there are options for first-time buyers or applicants with less than outstanding credit.
Remember, you are more than just the number on your credit score. However, because credit is a concept that doesn’t always have well-defined parameters, navigating your way to buying a home can feel complicated.
The Citi team wants you to enjoy your home purchase. They are ready to help you understand mortgage program qualification requirements, including credit scores. Click here Learn how to get started with the home buying process with the confidence and knowledge you need.
