Buying a Home? Your Credit Score Matters
Credit scores are a numerical representation of your financial health and play a vital role in obtaining low mortgage rates and lowering your homeowner’ insurance rates, as well with your initial qualifications. Although higher credit score suggest that you borrow and pay your loans on time you don’t need a perfect credit score to buy a home! A great credit score can lead to more benefits, but it isn’t impossible to get the things you need for a home purchase with a less than great FICO score. Knowing more about your credit and how to improve it, can open up many opportunities for you!
What is a FICO score?
FICO (Fair Isaac Corporation) Scores are used by over 90% of the top lenders when making lending decisions, because it is the standard for making accurate and fair decisions about creditworthiness. It is a three-digit number (ranging from 300 to 850) generated by five different factors:
1. Your Payment History
35% of your FICO Score is determined by your payment history. This refers to whether an individual pay their credit accounts on time.
2. The Amount That You Owe
30% of your score is based on the amount of money that you owe. FICO considers that ratio of money owed to the amount of credit available.
This means that even if an individual has a lot of debt, doesn’t necessarily mean that they will have a low credit score.
3. The Age of Your Accounts
15% is calculated through the length of your credit history. Generally, this means that the longer you have had credit, the better your score will be, but this doesn’t mean that an individual with a short credit history will have a low a score because FICO takes into consideration the age of the oldest account, the age of the newest account, and the overall average.
4. Credit Activity
10% of your FICO Score is determined by any new credit established. New credit refers to any recently opened accounts that a borrower has opened in a given time period. This means that if a borrower has opened a bunch of new accounts in a short period of time, it is labeled as a risk and lower their score.
5. Credit Combination
The last 10% is based on the variety of accounts that a borrower has. Individuals should have a mix of retail, credit cards, installment loans (like auto loans), and mortgages.
Improving Your Credit Score for A Mortgage
Like we mentioned before, you don’t need to have a prefect 850 credit score to get a mortgage for a new home, however the higher your credit score is the more likely you can receive benefits like lower rates. The first thing to do when improving your score is finding out your stance on the FICO scale. There are several different online sources that can show you your score for free, including www.annualcreditreport.com. If, or once, you know what your score looks like, and you wish to improve it, the best ways to start include:
Making On-Time Payments
As we mentioned above, your payment history contributes to a majority of your FICO Score. By demonstrating consistent, on-time payments to lenders, you are able to increase your score. Be sure to check lenders are correctly reporting your payments as well. Some take additional time to process payment and that can be reflected as late payments to the credit bureau.
Diversify Your Portfolio
Opening new accounts can also help build credit. If you only have an auto loan, it benefits you to also have a credit care, or a retail card. It shows that you have the ability to manage multiple types of loans and can contribute to boosting your score. Just be sure not to open several accounts in a short time period since this will contribute to lower your score rather than raising it.
Don’t Cancel Debt
Many people think that paying off debts and closing accounts will raise their credit score, but this could actually lower the score overall. It would be more beneficial to keep some of these accounts open, but limitedly use them. Set up direct payments of monthly subscriptions, whether it be video subscriptions or subscription boxes, to maintain credit and reduce the risk of account closures.
Credit is challenging, but it is important to not be intimidated by it. Don’t underestimate yourself if your credit score isn’t high enough to buy a home. Many loan programs are available and consulting a Home Loan Specialist helps towards your journey to owning your own home. However, the most crucial thing to remember is you are more than just a number!