Are you trying to purchase a home but don’t have the best credit? That 3-digit number carries a pretty big weight in the mortgage process. The good news is, you don’t need a perfect credit score to buy a home. But you should work to improve your score as much as possible if you want to get the best deal on your mortgage.
Here’s what you need to know about getting your finances ready to buy a home.
What is a credit score and why does it matter?
Credit scores range from 300 to 850 and provide an overall measure of your track record for managing and paying off debts. A strong credit score, typically anything 700 or over, shows that you pay your bills on time each month, and that you’re unlikely to default on your payments.
A good credit score will get you a better rate on your mortgage, saving you thousands over the life of your loan. Meanwhile, a lower credit score will result in a higher mortgage rate, which unfortunately means you’ll pay more for your home over time.
It is best to know your credit score going into this process instead of assuming if it’s good or bad.
1. Check your credit reports
Start with getting a copy of your credit report and look for any mistakes. To review your credit reports you can start by visiting Annual Credit Report, a government-run site. This is the only website that’s federally authorized to provide free credit reports.
Once you have your credit reports, look through each report for mistakes such as incorrect names, addresses, credit lines that don’t belong to you, duplicate entries, incorrect status, and other errors that could lead to a lower credit score. If you see an error on your report, you should dispute it as soon as possible.
2. Pay down small debts
Once your credit reports are accurate and up to date, find ways to reduce the amount of debt you owe.
When applying for a mortgage, one of the major deciding factors is your debt-to-income ratio. This measures how much your monthly income goes toward paying back debt. Zillow offers a free debt-to-income calculator to help you find out what yours is. On average, mortgage lenders require your DTI to be smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage. WEOKIE mortgage lenders, specifically, recommend your DTI ratio to be less that 36%. Making sure you have this percentage or lower is crucial before applying for a mortgage. If you were to not have this percentage before applying for a mortgage, it could potentially hurt your credit score even if it is considered good.
When paying off a loan or credit card balance, you immediately improve your DTI and increase the possibility of approval. Think of this step as making room in your financial profile for your home loan.
By doing this task, you can improve your score dramatically and quickly.
3. Avoid taking on further debt
During the period of when you’re preparing to buy a home, and even while you’re going through the process of taking out a mortgage, it’s imperative that you avoid taking on any further debt.
Mortgage lenders monitor your credit throughout the entire lending process, which takes an average of 45 days to complete. Any changes could delay or even upend your financing. If a lender sees several credit inquiries leading up to your mortgage application, it will be a red flag that you’re too reliant on credit.
4. Avoid closing any credit accounts
It might seem counterintuitive, but you should avoid closing any revolving credit accounts like credit cards, even if you aren’t using them. Closing an account immediately reduces your available credit.
Keeping the account open but inactive shouldn’t hurt your credit but closing an account so close to applying for a mortgage can also cause concern on the lender’s part. If you really want to shut down the account, wait until after you’ve closed on your new home.
We’re here to help
It may take months to improve your credit score, but if you work hard and stick with it over time, you will begin to see your progress. Make these smart decisions to help with your credit score today. Tackling your debt now will put you on the right track to becoming financially stable.
Come meet with a WEOKIE Trusted Advisor to discuss your plan or contact our after-hours Mortgage Loan Officer to assist you as well. We are here to help you find your dream home and build your wealth.
Give us a call today at (405) 235-3030 or 1-(800) 678-5363 to discuss how we can help you prepare for a new home.
Federally Insured by NCUA