Thinking of buying a home in 2021? Make it a habit to check your credit score!
Updated: Dec 19, 2020
It is a no brainer that before you make any large purchase like a car or a house, one of the first things you should do is check your credit score. If not, it should be! Let’s face it, there really is no excuse with how easy it is these days (thank you Credit Karma). Research has shown that people who plan for big purchases (like a home) are less likely to have financial trouble down the line. So, what is the first step in planning your finances? CHECK YOUR CREDIT SCORE!
I know I get it; I was that person too. The one who never cared to learn about this stuff. “as long as its high, that’s all that matters right?” I was so wrong. It really is so important that you have an understanding of how you get your credit score and to be aware of the things that affect it, especially if you are thinking of adding “Homeownership” to your resolution list.
Your credit score (the number seen usually between 300-800) is determined by your credit report, and your credit report contains the following: the status of your credit accounts (i.e. credit cards, student loans, car payments, etc.) and your payment history for these accounts (do you pay on time all the time?). Lenders (banks, mortgage companies, credit card companies) will use your credit report to help decide if they will lend you the money you have requested and at what interest rate. Credit reporting agencies will compile all your credit reports and come up with your credit score using a scoring model (a carefully calculated mathematical formula). Your credit score predicts how likely you are to pay back the loan on time, the higher the score, the better you look to a lender.
While different lenders use different scoring formulas (you may have seen the terms Experian FICO score, Equifax FICO score and a TransUnion FICO score.), and each lender has a different range to which they will approve or deny you, in most cases, your credit score should be about the same for each. Even though each lender may calculate your credit score differently (Experian, Equifax and TransUnion), they all look at the same key information: Your payment history, your debt to income ratio, your length of credit history, how you handle managing different accounts (credit card payments vs. car payments) and if you have and new credit accounts that have been opened in the last 6 -12 months.
Are you still with me? If you are, I hope you are figuring out why your credit score is a vital part of applying for a mortgage. Your credit score will determine what loan programs you may qualify for, your interest rate, and how much house you can afford, all of which are pretty important when your thinking of buying a home.
Checking your credit score is quick, easy, and no it does not make your score go down. I like using Credit Karma or annualcreditreport.com, but there are many others you can use, and no these sites do not affect your score negatively!
So, what happens if your credit score is not as high as you thought it was, or if there is something on there that doesn’t quite look right? First off, do not panic! Credit guidelines are flexible! Get in touch with a mortgage professional. They can take a closer look at your credit report and they should be able to help guide you as to how you can improve your score BEFORE you are ready to apply, so that you can get the best rates!
Remember, getting a pre-approval is one of the first steps to becoming a homeowner! (see my first-time home buyers guide) Don’t miss out on your dream home because you don’t think that your credit is high enough. I have a wonderful group of mortgage professionals that can help you break down your individual credit report and have you on the way to homeownership in 2021.