Hoping to buy a home? You’ll likely need a strong credit score first. Establishing good credit is crucial to building a solid financial foundation in your everyday life. Without it, banks likely won’t lend you the loans necessary for buying major purchases such as a car, cellphone, or (your biggest purchase of all!) a house.
If you’re wondering how do I improve my credit score, you’re not alone. According to a survey conducted by NerdWallet, only a quarter of Americans check their credit score monthly and nearly one in eight Americans have never checked their credit scores. Yikes. To make matters worse, the personal finance website also points out that roughly 40 million Americans have a FICO credit score lower than 600 (not great!). Unfortunately, many of these Americans don’t understand the negative impact that a low credit score can have on their home buying potential.
Fortunately, there are ways to improve your credit score and subsequently, increase your creditworthiness down the road. Keep reading to find out why a good credit score is so important for buying a home in today’s market.
Why is a good credit score important when buying a home?
Your credit score is a major factor in whether or not you’ll be able to qualify for a home loan. In fact, if you plan to purchase a home with credit, you’re going to need a strong credit score in order to secure a mortgage from a bank. After all, banks won’t lend money to just anyone – especially someone who has a proven history of not paying their debts. And what better way to look at a person’s financial history than by looking at their FICO credit score? In addition, those with higher credit scores are more likely to obtain better interest rates and may be able to get away with a lower down payment. Those with bad credit may not be able to secure a mortgage at all – and if they do, the mortgage rate could be higher, meaning higher interest payments each month.
What credit score do you need to buy a home?
It depends on the type of loan you’re applying for and the individual lender’s requirements. According to The Lenders Network, “FHA loans have the lowest credit requirements of any mortgage.” This type of loan requires at least a credit score of 500. However, a conventional real estate mortgage will likely require a much higher credit score. Credit Sesame notes that the minimum score required for a conventional loan is 620. In general, it’s important for your credit score to be above 600 if you wish to purchase a home. And as a rule of thumb: the higher the credit score, the more likely you are to be approved for a home loan. To avoid high interest rates, aim to get your score above 700.
How do I improve my credit score?
To get your credit score above 700, start building a strong credit history as soon as possible. According to Credit Karma, factors that affect credit score include: credit card use (credit use compared to total limits), payment history (percentage of on-time payments), derogatory marks (collections, tax liens, etc on your report), credit age (how long you’ve had accounts open), total accounts (total open and closed accounts), and hard inquiries (the number of times you’ve applied for credit). To improve your credit score, you’ll need to address all of these factors. That means requesting a higher line of credit, paying credit card minimums on time, fixing late payments, applying for more credit cards, improving your debt-to-credit ratio (keeping balances low) and reporting any errors on your credit reports.
Other tips for purchasing a home
In addition to improving your credit score, there are a number of things you can do to prepare for buying a home.
- Save money for a down payment – In order to buy a home with a loan, you’ll most likely need a good chunk of change saved away for the down payment. This down payment is an initial, upfront payment for the home that is typically required when purchasing a house with credit. Most home buyers put down anywhere from 3 to 20 percent up front, however, a 10 to 20 percent down payment is the norm. The more money you’re able to put down ahead of time, the stronger your home offer will be. For instance, if your offer includes a 20 percent down payment, but the competing offer includes a 10 percent down payment, then your offer is more likely to appeal to the sellers.
- Get pre-approved for a mortgage – Before purchasing a house, go ahead and get pre-approved for a mortgage. Not only will this help you to figure out how much house you can actually afford, but a pre-approval letter will also help strengthen your offer in the eyes of the seller. To get pre-approved for a mortgage, simply gather all credit reports and income information from tax returns, W-2s, bank account statements and pay stubs. Have your loan representative submit your application to a lender. After they’ve reviewed your assets, you’ll receive a pre-approval letter.
- Avoid moving money around – It goes without saying that when you buy a home, your bank accounts and credit history will be carefully scrutinized by the lender. So when waiting for loan approval, the last thing you want to do is make another large purchase or move money from one account to the other. Try to keep your bank accounts and credit as steady as possible until after you close on the house.
- Don’t forget about closing costs – Many first-time home buyers aren’t aware that closing costs are in addition to the price of the home. According to The Balance, these closing costs include paying for things like “title policies, recording fees, inspections, courier charges, reserves to set up an impound account and fees that a lender charges.” The personal finance website also notes that closing costs are typically anywhere from 2 to 4 percent of the purchase price.
- Find a good Realtor – Most importantly, before looking at homes, be sure to hire a trustworthy and experienced Realtor. A top-notch Realtor should know the local market like the back of their hand, and be able to handle all legalities and paperwork efficiently. If you’re a first-time home buyer, make sure to choose someone who can walk you through the home buying process, as well as provide you with a long list of home professionals (think: contractors, painters, handyman, carpenters, pool service and mortgage brokers). For more tips on finding a good Realtor, read our advice here.
- Explore the neighborhood – When house hunting, be sure to spend ample time in a neighborhood before purchasing a property. Visit local coffee shops, talk to the neighbors, walk your dog down the street and get to know the area before committing to the neighborhood.
Ready to move?
You’ve improved your credit score, snagged a loan and bought a home. Congrats! When you’re ready to move, check Moving.com’s extensive network of trustworthy movers. Our website makes it easy to find and book the best moving company for the job. All relocation companies in our network are licensed and insured, so you can rest assured that your move will be in good hands. Best of luck and happy moving!
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