How To Build Credit For Home Ownership
When considering buying a new home, getting a mortgage is usually part of the process. Your credit score plays a big role in whether you can get a good interest rate and qualify for a loan, so understanding it is important. Before you start searching for houses, it’s smart to work on improving your credit. This way, you’ll be in a stronger position to secure better rates and get a more favorable deal when you’re ready to buy.
Minimize Credit Inquiries
Life can be unpredictable, and there might come a time when you need extra credit. If that happens, try to limit the number of credit applications you make. This way, mortgage lenders won’t view you as someone struggling financially or desperate for money. Remember, if multiple credit checks occur within 2 weeks, they will only count as a single hard inquiry. So, if you’re comparing mortgage rates, do your research within that timeframe to avoid any negative impact on your credit score when you need it most.
Hard Vs. Soft Inquiries
Knowing the difference between hard and soft credit checks is essential because they affect your credit score in different ways. Hard checks show up on your credit report and can impact your score. These include applying for things like credit cards, a mortgage, or even some rental agreements and jobs. When a lender does a hard check, they can see all the past inquiries of this type on your report.
Soft checks show up on your credit report, but they don’t impact your credit score and are only visible to you. For example, soft checks happen when you look at your own credit report or when a company reviews your credit to update information on an account you already have with them.
Avoid Applying For New Loans
New credit inquiries make up 10% of your credit score, so think twice before opening new accounts just to get store rewards or save a bit on gas. Applying for credit frequently can raise concerns for lenders, who might see you as a risky borrower. This can hurt your chances when you’re trying to get a mortgage.
Keep Credit Card Balances Low
Credit utilization constitutes 30% of your credit score, so it’s important to monitor how much of your available credit you’re using. Even if you have a credit card with a $10,000 limit, it’s best not to come close to spending that amount. A good guideline is to keep your usage below 30% of your credit limit. It’s better to have a high credit limit and use only a small portion of it each month.
Using a large portion of your available credit can make lenders view you as a higher risk, even if you always pay off your balance on time. To find the right amount of credit to use each month, add up the credit limits for all your accounts (credit cards, loans, etc.) and then figure out what 30% of that total is. This will give you an idea of how much credit you should aim to use overall each month.
Pay Bills On -Time
Payment history is the largest factor in your credit score, accounting for 35%. It reflects how consistently you pay your debts on time, whether for current or past accounts. To keep your score strong, always pay your bills by the due date, even if you can only manage the minimum amount. Never miss a payment, even if you have a billing issue, and contact your lender as soon as possible if you’re worried about missing a payment.
Check Your Credit Report for Mistakes
If you’re planning to buy a new home, it’s wise to start practicing good credit habits early. Regularly check your credit report to make sure everything is accurate, and if you spot any problems, take action right away to fix them:
- Find the credit report that shows any late payments or inaccurate charges you want to challenge.
- Reach out to your creditor to discuss the mistake and request that they look into your claim.
- If the creditor is delaying or unwilling to correct the mistake, get in touch with the credit bureau.
Your credit score is a key factor in whether you can get approved for a mortgage, so working on improving it is always a smart move. Being financially ready for homeownership will set you up for long-term success. Take the time to evaluate your spending habits, set up a budget, ask questions, and consider getting professional advice to make sure you’re fully prepared to buy a home. Curious about the current housing market or need tips to boost your credit before purchasing a home? Contact our team to begin the discussion!