Buying your first home is an exciting milestone. Buying a home is a multi-step process. The most important step is to insure that your credit score is as high as possible. Your FICO credit score is a three digit number ranging from 300-850. The higher the score, the better interest rate which equates to a lower payment. For a small fee, your credit score is available through myfico.com If your credit is less than stellar there are things you can do to improve it before meeting with a mortgage lender.
- The first step in managing your credit is to familiarize yourself with the credit reports. There are three credit bureaus: Equifax, TransUnion, and Experian. Each bureau will allow you to review your credit report for free once a year. When you are planning on purchasing a home, it is in your best interest to download or print your report from each bureau. If you want to make sure everything is accurate with no intention of buying for a few months or a year, then you should pull your report from a different bureau every few months.
- Once you have reviewed your credit report(s), dispute any incorrect information. Most people find a few discrepancies. It may be as simple as a misspelled name or an account number that has been transposed by mistake. Other discrepancies could be more damaging such as an account or purchase that you never authorized. This could indicate identity theft and should be addressed immediately. Any error could cause your credit score to be many points lower. Using a service like Credit Karma will allow you to review your credit reports, learn your FICO score, and allow you to dispute any discrepancies electronically.
- After you have reviewed your credit reports and reported any inaccuracies, you can begin to build your credit up and improve your score. First and foremost try to pay down or pay off new or high interest credit cards. It can be hard to pay extra on accounts especially when you are short on cash. My best advice is to follow a strict budget, cancel any memberships that aren’t being used or you can go without for a while, and sell items to bring in extra income. The ratio of the balance on your credit cards compared to the credit limit is called your credit utilization ratio. If you have a $1000 limit on a card with a $600 balance, your credit utilization ratio is 60%, which is considered very high. You want to pay down the balances on all of your cards as low as possible. The lower the balances, the higher your credit score will be.
- From this point on make sure you pay every bill on time every month. Even one late/missed payment one month can hinder your credit score.
- Now that you have increased your credit score and cleaned up your credit reports, it is time to meet with a mortgage lender to get pre-approved and start house shopping. The mortgage lender will pull credit reports, verify your income, bank documents and tax filings. We can recommend local lenders that are knowledgeable and can work with individuals with lower credit scores, as well as offer special programs for teachers, police officers, and veterans.
- One last and extremely important tip: Once you have your pre-approval and until you have closed on your new house, do not open any new accounts or make any large purchases. This can hinder the mortgage process and cause you to lose your dream home.
When you are ready to purchase your home, or if you have any questions regarding the home buying process, please give me a call at 970.393.3424 or sign in to my website.
If you would like more information on how to repair your credit, please click on the following links: