Home Buyers: Things You Can Do To Improve Your Credit Score
Your FICO score can make all the difference in your mortgage interest rate and loan amount when purchasing a home.
In our last article, we discussed mistakes made in buying a home. The first one, of course, is trying to buy a home without being pre-qualified (or better yet, pre-approved) for a home loan by a mortgage lender. Of course, being qualified or approved by a lender involves having a creditworthy background. And while loan are out there even for buyers with very bad credit, you’ll find you will be paying a whole lot more for a whole lot less, until your credit score improves.
What is a “credit score?”
A credit score is based on a mathematical algorithm that takes into account the amount of credit you have, the amount you owe, and the timeliness of your credit payments. The score is typically referred to as FICO, which stands for Fair Isaac Corporation. Fair Isaac Corporation is a publicly held organization that offers a service to financial organizations to underwrite the risk of granting a loan or credit. The higher your FICO score, the better your credit rating. The better your credit rating, the lower your level of risk appears to creditors.
What can home buyers do to improve their FICO score?
The first thing you can do is to check your credit score. One suggestion we always make when you’re starting to consider buying a home is to contact a mortgage lender who can not only run your credit report and provide your score, but can also provide you with professional advice on exactly what you can do to improve your score based on your finances and home buying needs.
The next obvious step, of course, is to make sure you are paying your bills on time. Past due and late payments are reported to your credit bureau, and do affect your credit score. Consider setting up automatic payments or at least automatic payment reminders to help you in the process. If you are behind on any payments, get them current and keep them current.
Pay it down. Reducing the amount of overall debt you owe will lower your debt-to-income ratio, which is another major determining factor in credit worthiness.
Collection accounts. If any of your accounts have been referred to collection, take care of those asap. In some cases, you can negotiate a final settlement that is less than what you originally owe, but get it done. Once you have settled, make SURE you obtain a letter of clearance from the collection agency or the original creditor. The collection account will be reported to your credit bureau and can remain on your credit record for up to seven years. Having something officially in writing showing you have paid the debt can be used on a case-by-case basis to demonstrate your worthiness.
What if you don’t have any credit?
In some cases, we find home buyers who have always lived within their means, having paid cash for everything they own, which is great…except when it comes to buying a home. Unless you’re also paying cash for your home, having no established credit can impede your ability to obtain a mortgage loan. Usually those in this case can start off small by applying for department store or gasoline credit cards, and work their way from there. NOTE: We are not in any way encouraging you to run up debt in order to get a home loan! What we are saying is that, once you establish credit, use the cards sparingly and then pay them down or completely off. This will begin to establish your credit report and demonstrate your worthiness.
We are your real estate advocates!
The above tips are just the beginning. We can help answer all of your questions about the home buying process. As top producing real estate professionals with over 25 years in the industry, the Walker Team is your source for the best real estate experience you will ever have. Contact us with your questions.
Keller Williams VIP Properties
25124 Springfield Court Suite 100
Valencia CA 91355
Office: (661) 290-3781
Mobile: (661) 347-6248