Raising your credit score is never a bad idea – it increases your access to money and often makes that money significantly less expensive to borrow.
Boosting your score is particularly important when you’re in the early stages of the home buying process. Ten years ago, at the height of the housing boom, a good credit score wasn’t necessarily required for a mortgage. But in today’s tighter credit market, however, a good credit score can make the difference between home ownership and perpetual renting. And even if your credit score isn’t terrible, getting it as high as possible could save big money – an extra percentage point on the average home mortgage could cost up to $100,000 over the life of the loan.
Credit scores range from 300 to 850. The median FICO credit score in the U.S. is 711, a number that has held steady since 2011. One in five Americans has a credit score of more than 800, while one in four has “bad credit” – a score of below 600.
There’s no official fixed number that separates a “good” from “bad” credit score for every lender, but scores of 720 or higher are generally seen as desirable. These days, many lenders require a score of at least 700, with the best rates reserved for borrowers who rate at 760 or above. If your score is in the lower 600s, you may have trouble securing a conventional mortgage and the interest rates will be higher.
Your credit score is built over time and there aren’t any quick fixes. But there are some things you can do right now to start the process (and even reduce your other debts) when preparing to buy a home.
The first step is to review all of your credit reports in forensic detail. Are there missed payments listed that are older than seven years? Are there debts that you didn’t incur? Inaccurate information may not only lower your score, but it could be a sign of identity theft. You’re entitled to one free credit report per year from each of the three major credit reporting agencies. Visit AnnualCreditReport.com to review all of your reports.
Next, there are a variety of steps you can take to boost your credit score. Some of these include:
- Lowering your loan balances
- Using credit cards less frequently
- Making payments on time
- Consolidating your debt
- Increasing your debt limit
If you still need help qualifying for a mortgage, there are other options to consider. For example, FHA loans, which typically have lower credit score requirements than conventional mortgages, could be an option. Remember, too, there are other factors at play in addition to your score – your debt to income ratio, job history, assets and down payment amount will all affect the terms of your mortgage.
While you’re busy working to polish your credit score, don’t forget to put an equal emphasis on lowering (or eliminating) any high-interest debt you’re carrying. Outsized interest rates send money that could be going toward a down payment into the coffers of your lender. And by minimizing this debt, you make yourself more attractive to mortgage lenders.
It’s no secret that reducing debt and boosting your credit score may take considerable discipline and effort. But don’t forget – short-term sacrifices can have major long-term financial benefits in the form of a better interest rate and more home equity.
Source: MoneyEdu
