When beginning the process of buying a home, there are several financial aspects to consider before making this significant decision. Your first step before seeing any houses is to get pre-approved for a mortgage loan. This involves meeting with a lender and providing them detailed information about your current financial situation such as your income, debts, and any assets. This step is crucial in the home buying process, as it gives you a very clear understanding of what you can afford in the current real estate market, therefore setting realistic expectations for your home search.
When you’re attempting to get pre-approved, having good credit is a major factor. A higher credit score can qualify you for better mortgage rates, which can save you thousands of dollars during your homeownership. Navigating your credit score can be extremely confusing if you don’t know what goes into determining your score and what causes it to go higher or lower over time. If you’ve recently learned that your credit isn’t so great and you aren’t sure why, these reasons might be the cause!
1. Your Credit Score is Heavily Impacted by Late or Missed Payments
One of the most important aspects of your credit score is your ability to make payments on time. Missed and late payments not only lower your score but also signal to lenders that you may be a high-risk borrower. Mortgage lenders closely examine your credit history when determining loan eligibility and interest rates. Be sure you’re making all of your payments on time with no exceptions to raise your credit score and avoid costly late fees. If you get into the habit of making consistent and on-time payments, your score will gradually rise and potentially lead to more favorable loan terms and better rates. Maintaining healthy credit will make you look far more reliable in the eyes of mortgage lenders.
2. Having a Poor Debt-to-Income Ratio Hurts Your Chances of Qualifying for a Home Loan
Your debt-to-income ratio plays an important role when purchasing a home. Along with your payment history, this is one of the primary details that potential mortgage lenders pay attention to. Debt-to-income ratio is the total amount of debt you owe compared to your annual income. Lenders use this information to assess your ability to take on more debt in addition to what you already owe. If your amount of debt is higher than it should be for your income, it will lower your credit score, and lenders will have hesitations on whether you’re in a position to handle another financial endeavor. This can result is less than favorable mortgage rates and may even prevent you from qualifying for a loan entirely. Focus on paying down outstanding debt to improve your debt-to-income ratio before acquiring new debt, especially buying property. Taking the time to care for your credit health will not only protect your financial future but also help you qualify for a great home loan down the road.
3. Making Too Many Credit Inquiries Damages Your Credit Health
Each time you apply for a new line of credit and the creditor pulls your score; it actually lowers your credit score. If you make only one or two inquiries, this deduction of points is typically harmless. However, too many inquiries will eventually cause significant damage to your score. When you’re looking to buy a home, be sure to avoid making any unnecessary credit inquiries for a period of time and be more particular about how often your credit is being pulled in the future. This goes back to the emphasis that mortgage lenders put on a potential borrower’s credit score. Practice financial habits that will raise or keep your score steady and try your best to prevent it from lowering. As an example, it’s not recommended to try qualifying for a car loan at the same time you’re attempting to get preapproved for a mortgage. Doing so can result in poor rates for both your car and home loan!
4. Before Closing Any Credit Cards, Be Aware that it Lowers Your Score
Part of your credit score is determined by how long you keep your credit accounts open. If you close an account that you’ve had open for a while, it will harm your score because it decreases the average age of your credit history, which lenders consider when determining the type of home loan you can qualify for. Try to keep your credit accounts open and be sure to use them periodically to benefit your score. Focus on keeping your credit usage below 30% and maintaining an active account instead of paying it off completely and closing the account.
5. If You Want to Buy a Home, Avoid a Bad Debt to Credit Utilization Ratio
Another crucial element lenders investigate when determining your home loan eligibility is your debt-to-credit utilization ratio. The debt-to-credit utilization ratio refers to how much of your available credit line you’ve used compared to the total credit available to you. For example, if your credit card has a $10,000 limit and you’ve charged $5,000, that’s a 50% utilization ratio because you’ve used half of your available credit. This signals to lenders that you may rely too heavily on borrowed money. Additionally, if all of your lines of credit are maxed out or close to being maxed out, your credit score will seriously suffer. Prioritizing paying down your debt to improve your credit utilization ratio is one of the quickest ways to raise your credit score.
When Financing for a Home, Trust Your Local Experts!
It’s no secret that buying a home is one of the biggest financial transactions a person will ever make in their lifetime, and it’s important to have a clear understanding of how your credit score factors into homeownership goals. When it comes to financial planning for your real estate goals, trust your local expert REALTOR® to provide you with the right information.
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