It’s selling season and buyers are excited to take advantage of the incredible low interest rates out there. But before you start shopping for a mortgage, you should check your credit score. You need to know where your credit stands to be able to work towards the house of your dreams.
FICO credit scores start at 300 and go up to 850. If your credit score is lower than 650 you may not even qualify for a mortgage. Since the housing market crisis hit, lenders have instituted tighter standards. That means it’s really hard to get a loan, if you have a 620 or 650 score, let alone something in the 500s.
Even if you do qualify for a loan, your credit score can mean the difference between an affordable and expensive mortgage. Consider these three questions before you start mortgage shopping.
1. What’s affecting your credit score?
You need to know what your credit score is and how your behavioris affecting it. Go to annualcreditreport.com and order a copy of your credit history from the three national credit reporting agencies—it’s free one time each year. Look at every item on your credit history and determine if the information is accurate. Then, pull your score from one of the three credit reporting agencies to see exactly where you stand. This is not free but you need to know what your score is to start rebuilding, especially if you haven’t checked for several years .
Your credit score isn’t a fixed number, it constantly changes based on your credit behaviors and the information in your credit report, which itself is constantly being updated. Payment history is the largest factor used to calculate your credit score. If your score is lower than 650, it’s time to work on improving your credit behavior.
2. How can you improve your score?
In order to qualify for your mortgage or a better interest rate, you’ll need to start building your credit. Over the next year, focus on all the items on your payment history that are dragging your score down.
If you’re delinquent on student loans, get on a payment plan where you’re at least paying a small amount each month. If there are medical bills on your credit report , speak with all related parties as soon as possible. Pay all your rent and utility bills on time or early.
If your score is below 600, it may take a year or two to get back on track. Be patient and persistent and set your goals high on a score such as 670 or above. As you rebuild your credit score, lenders may be more inclined to work with you because they assume you are capable of making on-time mortgage payments each month. This means that in addition to qualifying for a mortgage, you may be able to pay back the loan at a lower interest rate.
The interest you have to pay for a mortgage can add up to hundreds of thousands of dollars. So if you are able to get a lower interest rate you could save your family a substantial amount of money.
3. Have you started saving for a down payment?
In the heyday before the Great Recession, lenders would approve loans that didn’t require a down payment and many people who weren’t qualified were able to own homes. Now, many buyers are required to put 10 percent down, if not more . It’s important that you start saving for a down payment as soon as possible if you are looking to buy. Borrowers who put down less will pay a higher mortgage interest rate.
In order to start saving, evaluate your budget. What items can you skip? How can you save more each month?While working on your budget, you should also determine how much of a mortgage payment you can afford. Don’t forget to factor in transportation costs into your spending estimates.
When you’re looking at how much to save for a down payment, you should plan to put down more than you have to. It lowers your loan-to-value ratio and that’s one of the key measures lenders use to assess an application, in addition to your FICO score and your debt-to-income score. By putting a little more down, you give yourself a greater cushion between the amount of the loan and the value of the home.
It’s wonderful that you’re working towards buying a home. In order to get an affordable mortgage, take it slow and make sure you know where your credit stands before you start picking out furniture.
WSB Radio’s Ilyce Glink Show – June 22, 2014
Thanks for listening.