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Credit Score Hacks for Purchasing a Home

Updated: Sep 30, 2023

Owning a home is still a dream for many. The biggest roadblock to homeownership is poor credit. The requirements and scoring process changes often and locks many out of the opportunity to own vs rent. I personally think the importance of credit and money management should be taught at a young age and in schools. It's not taught in most homes either so it significantly increases the lack of understanding. Yet most don't learn that they don't qualify for a mortgage until they apply.

"Money Talks but Credit Holds Conversations."

Your credit score determines whether or not you get approved as well as what interest rate you will pay. Before buying a house, it's essential to have a good understanding of how your credit history and credit score can impact your home buying process. Let's discuss some key aspects that you should know about your credit before you decide to purchase a home.

Your Credit Scores DO Matter:

  • Your credit score plays a significant role in determining whether you qualify for a mortgage and what type of interest rate you'll receive. Many people think just because they make a good salary, they will qualify for a home. Qualifying for a loan has more to do with your credit score. How much house you qualify for has more to do with your income. In a nutshell, lenders use your credit score to assess your creditworthiness and their risk before they lend you any money.

The Minimum Credit Score Requirements:

  • Different mortgage programs have different minimum credit score requirements. It helps to know your credit score before you apply. For example, FHA loans may have lower minimum score requirements compared to conventional loans. Research the specific requirements of the type of mortgage you're interested in. By working with a knowledgeable lender, you will learn the different types of programs you qualify for.

Credit Reports Are Checked:

  • Lenders will obtain a copy of your credit report from one or more of the 3 major credit bureaus as part of the mortgage application process. Review your credit reports in advance to ensure accuracy and address any errors. The 3 main credit vendors are Experian, Equifax and Transunion. Your middle score of the three is what is used by the lender as your score to qualify to purchase a home.

Credit History Matters:

  • In addition to your credit score, lenders also consider your credit history. They look at factors like your payment history, types of credit accounts, and the length of your credit history. All these factors help develop your credit score.

Credit Utilization Ratio:

  • Your credit card balances relative to your credit limits (credit utilization ratio) can impact your credit score. It's advisable to keep your credit utilization below 30% to maintain a healthy credit profile. Get your COMPLIMENTARY guide to building great credit here.

Impact of Late Payments:

  • Late payments on credit cards, loans, or other accounts can significantly hurt your credit score. Try your best to avoid making late payments in the months leading up to your mortgage application. If there are any late payments, because life happens, you can possibly write a letter of explanation.

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  • Did you learn the importance of credit growing up?

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New Credit Applications:

  • Applying for new credit shortly before or during the mortgage application process can temporarily lower your credit score due to hard inquiries. Try to avoid opening new credit accounts during this time. This can quickly lead to a denial.

Credit Counseling Programs:

  • If you're in a credit counseling or debt management program, it's important to inform your lender. Some lenders may have policies regarding borrowers in these types of programs.

Credit Score Impact on Interest Rates:

  • This is a big deal. Lower rates mean lower payments. A higher credit score generally leads to a lower interest rates on your mortgage. Even a small reduction in your interest rate can result in significant savings over the life of your loan. This is what you want to strive for as it will benefit you as a new homeowner.

Credit Repair and Improving Credit:

  • If your credit needs improvement, start working on it well in advance of applying for a mortgage. By all means, pay down existing debt, address any negative items on your credit report, and establish a history of responsible credit use as soon as you decide to purchase a home. If you need trade lines or need to boost your credit score, check out SELF Credit Builder here.

Pre-Approval vs. Pre-Qualification:

  • Get pre-approved for a mortgage before you start house hunting. This will save you time and decrease your disappointment. A pre-approval is a more comprehensive evaluation of your finances and creditworthiness than a pre-qualification. Most Realtors will ask for a pre-approval vs a pre-qualification. It also helps if you understand how much you can afford in advance and it strengthens your offer when buying a house.

Interest Rate Lock:

  • When you find a home and are ready to proceed with the mortgage application, consider locking in your interest rate to protect against rate increases during the closing process. Rates fluctuate often. I remember buying my first house and rates were above 12%.

Credit During the Homebuying Process:

  • Maintain stable credit behavior throughout the homebuying process. Any significant changes in your credit profile, such as taking on new debt or making late payments, can affect your mortgage approval.

Understanding these credit-related factors and taking steps to manage and improve your credit can help you secure a favorable mortgage with a great interest rate and make the home buying process smoother and more affordable. If you feel that you can't catch a hold of your finances or feel that you don't make enough to afford a house, learn how to break your money blocks here. It's wise to consult with a mortgage professional for personalized guidance based on your credit situation and homebuying goals. Follow me on IG for more real estate tips and information here at Triad Realty Group, LLC.

"Having a strong credit score is an asset."

Are you currently renting? Did you know your rent paid could be reported to the credit bureaus. Sign up here to have your excellent payment history reported and help boost your credit score.

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