Mortgage Milestone #1: Build Your Credit Score
As a first time homebuyer or even someone who wishes to refinance their current home, a bad credit score can be daunting. Bad credit can mean a harder time finding a loan or impossible interest rates on the ones available. Luckily for most people, their credit isn’t in dire straits. There are ways to improve credit with a little bit of budgeting and a lot of commitment. Here are four of the best ways to give your credit the boost you need and get the loan you’re looking for.
Know Where You’re Starting
Mortgage lenders typically look at your current income, how much you can place on a down payment, and your credit history before granting a loan. You should check your credit history to figure out exactly where your starting point is. If your FICO credit score is near the 500 range, don’t distress! Your credit isn’t as bad as you think. Under 500 is more worrisome, but there’s always a way to grow your credit score. When checking your score, make sure you’re not running your credit history through a lender as this could actually damage your credit score. There are plenty of free options online which will show you where you stand without doing any harm, so do your research.
Pay Your Debts
The number one cause of bad credit is having too many open lines of delinquent credit. For example, having student loans, a car payment, and two credit card payments means you have four open lines of credit. Look into consolidation if your debt is over $5,000 as this may be a helpful tool to cover all your debt in one monthly payment instead of budgeting for multiple accounts. If any overdue charges have gone to collections, pay those first as they are typically the biggest detriment to your overall credit score. These actions will help new lenders see your trustworthiness by setting up a history of on-time payments.
Reduce Your Ratio
The most important ratio to devote your attention to is the ratio between your income and your outgoing debt payments. You want to make sure your income is substantially larger than your expenses. Typically, lenders want to see that your debt payments are between 12-15% of your total income when you get a mortgage because that number will rise substantially after undertaking home loan. Again, debt consolidation under a single lender may be the best way to get your payments under control. This is because consolidating debt typically comes with a much lower interest rate than multiple open lines of credit under different lenders can guarantee.
Clear Inaccuracies and Stop Borrowing
As you’re looking through your credit history, be sure to look for any suspicious activity under your name. Especially if you have not taken out very many loans or used your credit cards often but still have a low credit score, be on the lookout for misinformation and report any proof you find to the credit bureau. The final nail in the credit score coffin, then, is also the most obvious. Stop borrowing funds immediately. If your credit history is already on unstable ground, the best way to stabilize yourself is to work off old debt before accruing more. Keep the goal of getting a mortgage in mind, and make it your priority by following these few steps!