Dreaming of buying a home someday soon? When it comes to the complexities of purchasing real estate, knowledge is power. And if you’re looking to buy, understanding — and raising — your credit score may save you thousands of dollars by helping you qualify for a home loan at a lower interest rate.
What is a credit score? It’s a three-digit number used by lenders and other financial institutions to assess your credit worthiness. Most scores range from 300—900, with the majority of people in the 600—800 range.
Depending on your personal financial means, a score of 720 or higher may help you to qualify for the lowest interest rates available at the time.
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This score may be the single most important factor in determining what type of home loan you may qualify for. Your history of borrowing and paying back loans on time is collected and documented by three main companies, called “credit bureaus.”
These bureaus then sell this information to banks, credit card companies, and most any entity that is interested in measuring the risk of lending you money.
But how do they rate your credit risk? In a very real sense, your credit score is a representation of your financial reputation.
Lenders mainly consider these four variables on your credit report: outstanding debt; outstanding debt relative to your total available credit; the length of your credit history; and whether or not you’ve recently applied for new credit (other than a mortgage).
While you can’t change the past, keep in mind that few borrowers have a perfect track record of repaying loans. The good news is that there are a number of things you can start doing that, over time, may help raise your score.
Make your payments on time. This is the most important factor affecting your score. Payments that are 30 days or more past due will negatively impact your score, and may show up on your report for up to seven years.
Keep total debt under control. If you have high balances on one or more credit accounts, for example, make it a priority to borrow less and bring the balances down.
Keep old accounts open. Length of credit history is another important factor, so it works to your advantage to keep older accounts in good standing open. Closing an old account may negatively affect your score.
Be cautious when opening new accounts. If you’re shopping for a new loan or credit card, do so over a relatively short period of time. You want to avoid the chance of your report showing that you are constantly looking for credit.
You may have heard that credit standards have changed since the financial crisis. While that’s true, you may be in a better position than you think to start the process of buying a home. A great place to start is to know your credit score and consult a qualified mortgage professional.
Jeff Bell is a partner at Cobalt Mortgage and a member of the New Home Council. “Market Matters” is the council’s weekly column offering insight into the housing market. For more information on homebuying, visit thenewhomecouncil.com.