Ever wanted to take a peek inside someone else’s home buying journey? Well, you’ve come to the right place. We’re lucky that Carrie S. Nicholson, one of the 15 partners in the Down Payment Movement has agreed to share her own story as she begins the process of buying a home. This is Part 3 of her story.
Buying a home is no small step towards the next phase in our lives. It has taken a lot of planning and strategic financial moves to set ourselves up for success. But in the end, finding and affording our dream home will be oh so worth it!
The next step in our home buying process is not as exciting as looking at homes online or attending open houses — but it’s nonetheless important. Here are the steps we’re taking financially to improve our credit score and how it’s working.
The Best Credit Score to Buy a Home
There are three major credit bureaus that a bank or mortgage company will review to verify your credit score. They are Equifax, TransUnion, and Experian. It’s important to review your credit account with each credit bureau to ensure there are no mistakes or mis-reported information.
If you find any errors, you’ll want to have them fixed before applying for a new mortgage. You want to give yourself the best chance at getting approved for a mortgage with the lowest rate.
In this article from Bankrate, you’ll see a complete breakdown of the best credit score you need in order to buy a home, provided by FICO. To get the lowest interest rate on a mortgage, it’s suggested to have a credit score of 760 or higher. Although anything over 700 is considered good credit and will still provide a very good interest rate.
At the very least you must have a credit score of 580 or higher in order to qualify for a Federal Housing Administration (FHA) loan with 3.5% down, for first-time homebuyers. Your credit score can go as low as 500 when applying for a mortgage but you’ll be required to save up a 10% down payment.
My husband and I are aiming to have a credit score of 700 or higher for before applying for a new mortgage. We want to have the best approval odds and obtain the best interest rate for a 30-year mortgage.
And we don’t have far to go!
3 Things to Improve Our Credit Score
Since early 2018, we’ve been diligently working on our credit scores. And I’ve been tracking our progress by checking my current credit score using the Credit Karma app.
After working to increase my credit score of the past few months, you can see that it’s steady been going up. As of March 22, 2018 my credit score has increased 22 points since I started tracking it closely.
Since then here are three things we’ve done to increase my credit score in preparation for applying for a mortgage in the coming months.
1. Request a Credit Line Increase
When reviewing my credit score account, one of the main factors that is negatively affecting my credit is the total debt balances. As you may already know there are five main factors that impact your credit score:
- Credit and loan balances
- Payment history
- Age of credit history
- Total credit accounts
- Mix of credit types
It’s recommended to use 30% or less of your entire credit card balance in order to have a healthy debt-to-income ratio. In my case my balances are a bit high, at 33% overall since the recommended range is below 30%.
In this situation, there are only two ways to reduce your debt balances to a healthy range:
- Pay down your debts
- Increase your credit limits
Obviously since we’re in saving mode we don’t want to use a lot of our money to pay down debt, so the next best thing is to inquire about increasing a line of credit.
It is actually pretty simple to do this! I logged into my credit card account online and requested a credit line increase. Within a couple of seconds I was approved! Many credit card companies will allow you to apply for a credit line increase online, but others require calling up customer service.
Either way, doing this is a very fast way get a quick win with your credit score, without having to pay down large amounts of debts.
It’s important to note that your credit card company will have to put a hard inquiry on your account to approve your request for a line of credit increase. Your score may be negatively affected, but it will likely be a small drop, and it will bounce back within a short amount of time.
Also, you should know that in some cases the credit card company can actually reduce your credit limit when you ask for a credit limit increase. This could hurt your credit score a lot, so proceed with caution.
2. Pause Applying for New Credit
Another important part of improving your credit score when buying a home means not applying for a lot of new credit accounts at once. Since our goal is to apply for a mortgage in the next few months, it doesn’t make sense to open a new credit card or buy a new car.
We’ve currently paused applying for any new credit until after we get pre-approved for a mortgage and our home purchase goes through. We want our credit to be in tip-top shape without too much new activity.
Applying for a new loan or credit card account activates a hard inquiry on your credit report which can cause your score to temporarily decline. In addition, your debt-to-income ratio can cause negative effects on your score if you continue to rack up additional debt.
It’s best to lay low and cut back your expenses so you can ride things out until the mortgage is approved!
3. Show a Long History of Paying on Time
As you can see, when you’re working towards a big goal like buying a house it’s a good idea to keep doing what you’re doing! There aren’t too many fancy tips or tricks to improve your credit. Sometimes the simplest strategy is to continue paying your bills on time, month after month.
Nothing will show a mortgage company or bank that you’re a safe bet quite like consistently paying your bills, loans, and credit cards on time. It’s also important to keep all of your bank accounts updated and clean up any past due bills.
Another smart idea, if you have enough time to plan, is to take out a loan or credit card with the company you’re hoping to fund the mortgage. Keep in mind that you’ll want to do this many months, or even years, before applying for a mortgage.
For example, I’ve been a long-time customer of Chase Bank. I have a personal credit card with them, as well as personal and business bank accounts. They were also the company to fund my first mortgage when I was 22 years old.
Basically, I have a longstanding (and good!) history with Chase Bank. In the event we would want to apply for a mortgage with them, I’m confident we could get approved for a good amount of money and a great interest rate.
It takes time to improve your credit in preparation to buy a home. Do what you can to plan ahead, make smart money moves, and pay your bills on time, every time.
Just know that building good credit is a long-term strategy! And good financial management, a decent down payment, and reducing your debts will put you in a great place for getting the home of your dreams.