The real estate market is heating up, and if you’re like many people today, you’re probably thinking of buying. With interests rates currently at a reasonable level, buying could be more affordable than renting a home. The first step to buying a home that you should take is determining what you could afford. Speak to a mortgage broker at your bank to determine what you could afford and what type of financial assistance they could offer you. In addition to looking at your income and savings, the bank also looks at your credit score. It is important to clean up your credit before you buy so that you are approved to buy once you find the home of your dreams.
Check your Credit Score
A person’s credit score tells the bank whether they are able to pay back the money that is being lent to them on time. The score is based on your credit history, the balance on accounts you currently have (versus your credit limit), whether your payments were late, the age of your credit and the number of accounts you have open. Be proactive and before walking into the bank, check your credit score so you know if you need to clean up your credit or if it is currently high enough to be approved for a mortgage. There are plenty of free apps and websites that can give you an idea of your credit score such as Credit Karma. Use these free credit score services as a guide not a definite, because usually it is only free because it is not the total credit picture. For example, Credit Karma only supplies you with your score for two out of the three U.S. credit bureaus. You may find that your score is actually higher or lower because of that third credit bureau. For a small fee you can purchase your complete credit report, which will give you your total credit score.
Identify Weak Credit Spots
Experian, Equifax and TransUnion are the three main credit bureaus in the United States. Your full credit report (that you purchased for a small fee) will give you the scores for each credit bureau. The age of your credit, outstanding balance vs credit limit, and late payments will all be listed on this report. Carefully review your credit report, paying close attention to the section “adverse accounts” section. This section of your credit report will tell you where you have defaulted or missed payments. Late, missed or defaulted payments are a huge blow to your credit score.
Another weak spot is utilizing more than 40% of your credit limit. If you’re maxing out your cards, that is a bad sign for lenders. A low balance vs credit limit shows that you use discretion and are responsible with your spending. A high balance might hint that you spend too much for what you make. The age of your credit is a consideration for lenders looking to finance a mortgage. Credit age is determined by the age of your open accounts. The idea behind looking at your credit age is for lenders to get an idea of how long you have been responsible in using the credit system.
Clean Up Your Credit
Once you identify your weak spots, it’s important to pay close attention and make a point of paying those accounts on time to clean up your credit. Once you have started making payments on time, you should see an improvement in your score in just a couple of months. If you only missed one or two payments, you could contact the company and see if they would remove it from your report. Some companies will do this for you since it was only once or twice and you had a good history of paying them on time.
Create reminders in your calendar to notify you when payments are due. Automatic withdrawal is a good way to ensure your accounts are paid on time. Car loans can be automatically withdrawn from your account, as well as other bills and credit cards. If you are worried about having the total balance from a bill such as your credit card withdrawn from your account monthly, you might be able to have the minimum due withdrawn from your account. You could always go into your account to pay the balance after the fact, but at least you will have a payment on record on the date your balance was due. This small step will make a big impact on your score.
Credit Limit Increase
A sign of good credit is a low outstanding balance to credit limit ratio. If your outstanding balance to credit limit ratio is high, your credit score is lowered. The easy fix to this credit problem is to request a credit limit increase. This will lower your outstanding balance to credit limit ratio. Most creditors will allow an increase as long as you have been current on your payments. This is a way to clean up your credit that takes very little effort. One call could fix this one area of your credit that will give it a decent boost.
While reviewing your full credit report, keep an eye out for mistakes. Every once in awhile the credit bureau will receive incorrect information, which will impact your score. If you spot a mistake, do your research and write a letter to the credit bureau with all supporting documentation. Correcting a mistake on your credit report may take some time, but it is worth it because it will increase your score.
Your credit score is your first impression to lenders. Your score determines whether or not banks and creditors will lend to you. It is vital that you stay on top of your credit report, and clean up your credit when problems arise. Once you clean up your credit, you can go to the bank confident that they will help you finance the house of your dreams. If you need help finding your dream home, contact our sales team at Leighton Realty.