What to Know About Your Credit Before Buying a Home

It's Not Just Whether You Pay Your Bills on Time That Matters

 
Like it or not, your credit score is one of the most important numbers in your life, ranking up there with your social security number, Date of birth, and wedding anniversary. This three-digit number is your financial report card, except there's no getting rid of it after college. Your credit score shows lenders just how trustworthy you are when it comes to managing your finances, and it can either save or cost you thousands of dollars throughout your life. If you're in the dark about just how significant this number can impact you and the details behind your personal score, here's an overview of what you need to know.
 
 

How Your Score is Calculated

 

Your Fico Credit Score is Compromised of Five Elements, According to the Fair Isaac Corp

 
1. 35% of your score is attributed to how you pay your bills. Points are added for paying on time and deducted for late or missing payments. (this is a big portion of your score, so if you're not paying bills on time, its best to get that under control)
 
2. 30% of your score is based on your credit utilization ratio. Translation: how much money do you owe compared to the amount of credit available to you? The lower this ratio the better.
 
3. 15% is based on the length of your credit history.
 
4. 10% of your score goes to the type of credit you have. Like revolving credit ( credit cards) and installment credit (car loans or mortgages)
 
5. The last 10% is impacted by new credit applications. How often and for what type of credit are you applying for?
 
To access your credit report, use a website such as annualcreditreport.com, which will give you one free report a year, or creditkarma.com. Which will provide you with free access to your credit score upon signing up for an account. Once you have copies of your report and scores, immediately look for Fraudulent information or erroneous information. If you find anything, immediately contact both the credit reporting agency and the company that is portraying inaccurate information to determine the next steps.
 

How Your Score Can Cost You


Your score can range from 300 to 850. You'll find a variety of breakdowns on what's considered "Good" compared to "Excellent" versus "Poor," but in general you'll want to aim for a score of 740 or higher, which is the "Very good" range. The higher your credit score, the more creditworthy you appear to lenders (meaning they can rely on you to pay them on time), which translates into lower interest rates and more money saved when taking out a loan.
 

Not Sure How This Can Play Out Financially? Consider This

 
Meet Claire: She is 35, pays her credit card off in full each month, has all her bills on auto-draft, and never misses a payment. She has had a positive credit history for 10 years and wants to buy a home. Claire was approved for a $200,000, 30-year-fixed-rate loan at 3.75%.
 
Meet Steve: he's 32, obtained a credit card at age 18, ran up some debt in college that he's still working on paying down, and has no system for keeping track of bills. He has consistent late and bounced check fees. Steve wants to buy a home and was approved for a $200,000, 30-year-fixed-rate loan at 5.5%.
 
What's all the fuss about if they both got approved? Over the life of her loan, claire will pay $133,443.23 in interest. Over the life of his loan, steve will pay $208,808.08 in interest. A small interest rate difference of 1.75% translates into $75,364.85 more paid by steve! $75,000 is a pretty significant sum of money that could be used towards other goals.
 
Having a solid credit score is one of the most financially savvy tools for you to have on hand when it comes to buying a home. When managed wisely, your credit score will bring you confidence, peace of mind, and more money saved via lower interest rates. When mismanaged or not cared for at all, your credit score can delay your success in meeting financial goals and result in additional funds and resources spend correcting past mistakes.
 

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