Planning on buying a home in Skagit County? You’ll find a host of gorgeous Anacortes homes for sale, including beautiful real estate on the waterfront. Before diving into the excitement of home shopping, however,you should first attend to one the nittier steps of buying a home – putting your finances in order.
Start by taking a good look at your credit score. You’d want to get the best possible mortgage terms and conditions so your new home won’t turn into a financial nightmare down the road. And to qualify for the best possible terms, you need a great credit score.
Where can you get your credit score?
Contrary to what many believe, you won’t find your credit score on your credit report. Instead, you can get it through any of the following:
- Use a free credit score site
- Ask your bank, credit card provider, or other financial institutions
- Purchase your credit score from FICO, or from one of the three credit bureaus – Equifax, Experian, and TransUnion.
Why are credit scores important?
Your credit score is what banks and lenders use in evaluating your creditworthiness, or your ability to pay a loan. The higher your credit score, the less risky you’re seen as a borrower. This gives lenders the confidence to offer you favorable loan terms, such as higher mortgage limits, lower interest rates, and longer payment periods.
Credit scores range from 300 to 850. While individual lenders may use different criteria in determining mortgage terms for individual borrowers, the following standard is generally followed:
- 800 to 850 – excellent
- 740 to 799 – very good
- 670 to 739 – good
- 580 to 669 – fair
- Below 580 – poor
You may still obtain a home loan with a low credit score, but you might have to make do with less than stellar credit terms.
Tips on how to improve your credit score
- Get a copy of your credit reportYour credit report is what financial institutions use in determining your credit score, so it’s important to review it and see what lenders are seeing.
You can ask for a free copy of your credit report from any of the three credit bureaus, Equifax, Experian, and TransUnion. Your credit report includes your personal data, such as your SSS number and employment details. It also contains information on your credit and spending history, including your lines of credit, bank, and credit card account balances, and payment history. Negative information, including bankruptcy, is retained for 7 years or more.
- Understand how credit scores are determinedCredit scores are determined using the following matrix:
- Payment history – 35%
- Outstanding debts and loans – 30%
- Credit history – 15%
- The number of credits in use – 10%
- Account inquiries – 10%
Review your credit report against this to see what could be pulling your credit score down, and what you can do to improve it.
- Check your credit report for errorsThere have been many known instances of credit report errors, such as bankruptcies that still show after 10 years, duplication, or outdated info. If you notice any mistake, file a dispute with the credit bureau and creditor. It can be corrected in around 30 days. While the disputed info is being investigated, it will not be included in getting your credit score.
- Improve your debt to income (DTI) ratioYour DTI ratio measures the percentage of your debt to your monthly income. It’s one of the key figures lenders look at because it’s a good indication of how well you manage your credit utilization. The ideal DTI is 28%, but if you can get this to a much lower figure – say, around 10% – you can improve your credit score significantly. To achieve a better DTI ratio, pay down your credit card and other credit balances to within 28% or less of your income.
- Pay your bills on timeLate payments can reflect badly on your credit score, so make sure to always be on time when paying your bills. While a history of late payments can stay on your credit report for 7 years, its impact gradually decreases over time.
- Do not close out paid loansAfter paying off a substantial debt, such as a student loan or car loan, don’t close it immediately. Lenders look favorably at borrowers with a good credit history, especially if they have been paying regularly and on time. Even with a record of late payments, paid loans are proof that you have successfully managed debts in the past.
- Avoid opening new lines of credit or taking out significant loansEvery time you make an inquiry for a potential loan, such as a car loan, lenders and creditors pull a hard inquiry on your report. The more inquiries your credit report receives, the more your credit score is pulled down. While the effect is only temporary, it can work against your favor if you’re applying for a mortgage at the same time.
If you need more help and info on getting financially ready for a home purchase, give us a call. We can help connect you with financial and mortgage brokers. And when you’re ready to take the next step in your home buying journey, make sure to give us a call. Call us, The Groesbeck Group, at 360.941.3734 or email Info(at)JeanGroesbeck(dotted)com.