Taking the steps to becoming a homeowner can be an exciting yet frightening time. You can minimize the scary part by preparing yourself in a way that gives you the most buying power. Improving your credit score lets you receive the lowest interest rate for your financial situation, meaning a lower monthly payment that makes homeownership even more affordable. In this blog, we’ll discuss how a good credit score means a better mortgage rate when you choose to buy a home.
Why Your Credit Score Is Important
When you buy a home, your payment history, credit utilization and credit age are the main parts of your financial life that a lender will review. Your score is determined by how you use credit in the form of credit cards, auto loans and personal loans.
- Payment history shows lenders how you tend to pay your monthly bills. On-time payments over a long period of time help your score. Late payments reduce your score.
- Credit utilization measures how much of the available balance on your active accounts is being used. Typically, credit cards should remain below 30% utilization; anything higher and it could lower your credit score.
- Credit age is the amount of time a credit account has been opened. The longer the account has been open and active, the better for your credit score.
- Credit scores range from 300 (poor) to 850 (excellent). The higher your score, the better interest rates you will be offered from lenders. Another key factor that lenders review is your debt-to-income ratio (DTI). Both will give the lender an idea of how likely you will be to pay back your loan on time.
As you can see, improving your credit score as much as possible before you apply for a home loan puts you in the best financial position to save money. It can also reduce the stress that naturally comes with buying your first home. You can learn more about why good credit is important here.
Building Credit Basics
To improve your credit, you’ll need to take an honest look at your financial picture. This means assessing your current financial information, reviewing your latest credit score and making your loan payments on time each month.
- Assess Your Debt: Get a clear picture of all your monthly debt obligations and compare them against your gross monthly income. The goal is to have a DTI of 28% percent or less to qualify for a home loan so pay down your debt to get to this level.
- Review Your Credit Report: Review your credit to see all the active and closed credit accounts in your name. Identify and correct any errors found by contacting the three U.S. credit bureaus: Experian, Equifax and Transunion. You can obtain a free credit report each year from them at annualcreditreport.com.
- Make Payments On Time: Ensure you make all your loan and bill payments on time. Your payment history makes up 35% of your credit score so it is essential to show a positive history. Just one missed or late payment can have a negative impact.
Shopping For the Best Rate
While building your credit score is key, another factor to receiving a low interest rate is to research mortgage loan companies. Each lender has its own loan programs, rates and requirements. Look for a loan that offers the rate, terms and features that fit your situation. Having a great credit score lets you shop for competitive interest rates across multiple lenders, so take advantage of the work you’ve done to build your credit score.
Another smart move is to get pre-approved with a lender so you can see all your loan options. A pre-approval lets you know how much of a home loan you can afford and what the monthly mortgage payments will be. This lets you stay within a price range that fits your budget.
Stay Focused on Your Home Purchase
Once you have worked on your credit, received a pre-approval and selected a lender, be sure your finances remain focused on your home purchase. Getting into any additional debt while your home purchase remains in escrow could negatively impact your chance of getting your loan approved, even with a pre-approval. For example, adding additional debt at this time could lower your credit score, which could impact the interest rate that you received when you applied for the loan. Additional debts will also affect your DTI.
Closing on your home loan will require a down payment, paying closing costs and other expenses. Visit Travis Credit Union’s Home-Buying 101 blog to learn more about the things you should do to prepare for your home-buying journey.
How Travis Credit Union Can Help
Travis Credit Union is focused on your financial wellness so that you’ll be in the best position to buy a home. Our knowledgeable mortgage loan consultants can help identify the right loan for you and will walk you through the entire home loan process. Visit our Mortgage Hub to get started.
TCU can also help you save money for a down payment, build your credit, consolidate your bills and more. Visit Traviscu.org today to see what TCU can do for you.