Know What You Can Afford
When it comes time to buy a home, if you are like most people, you will be looking for a mortgage. Before you apply for a home loan, you should obtain copies of your credit report so that you can check for errors, see how much money you owe on credit cards and loans, and to see what your credit score is. The information in your credit report will determine if you qualify for a loan and what interest rate lenders will offer.
Check Your Credit Report
You should review your credit report from the three major credit reporting companies – Equifax, Experian, and TransUnion. You have a right to one free copy of your credit report from each reporting agency per year.
Read over each credit report carefully. Make sure your name is listed correctly. Check all addresses and employer names and make sure you have lived at and worked at all listed.
Then, carefully review each account listed on the report. Make note of any accounts that:
* You don’t recognize
* Are duplicated on the report
* Have been closed but are listed as open
* List an incorrect balance
* Include negative information such as late or missed payments
Finally, check the Credit Inquiries and Negative Information sections on your credit report for companies and accounts you don’t recognize. You should immediately report any errors, fraudulent information, or outdated information to the credit reporting agency, as well as the company that provided the information to the credit reporting agency.
Maximize Your Credit Scores
There are many ways to obtain your current credit score. Many major credit card companies will list your credit score on your monthly statement. Some non-profits will provide scores and help you understand the score. You can also purchase a credit score from a credit reporting company.
If your credit score is low, there are several actions you can take to increase your score:
1. Stay Current on all Payments
A large portion of your credit score is based on your payment history, so you should maintain a history of positive payments. This includes credit card payments, loan payments, utility bills, student loans, and any other bills. Accounts going into collections status can drop your credit rating. Make sure you stay on top of your payments and respond quickly to any collection letters.
2. Pay Down Your Account Balances
The amount of available credit you are using compared to the amount of credit you have available is referred to as your credit utilization ratio. The higher the utilization ratio, the lower your credit score. For example, if you have a credit card account with a $2,000 credit limit and you maintain a balance of $1,000 on it, then your credit utilization ratio is 50%, which is considered very high. Maintaining balances below 15% of the limit will maximize your credit score. Paying down your balances could increase your score by 40-50 points.
3. Do Not Apply for Credit or Open New Accounts
When you apply for a new loan or line of credit, you give a creditor permission to pull a copy of your credit report and the issuing creditor will run a hard inquiry. If you know you will be applying for a mortgage soon, hold off on opening any new accounts because these could add credit inquiries and a large amount of debt to your report which lowers your credit score.
4. Have a Mix of Credit and Loan Account Types
It’s good to have a few different types of credit cards, store cards, and auto loans and loan accounts to really maximize your credit score. Having only credit cards can lower your score.
5. Don’t Close Old Accounts
The average age of your open accounts make up 10% of your score; the longer your accounts are open, the better.
6. Dispute Your Negative Accounts
You may be able to remove late payments and collection accounts from your credit report by disputing them. Contact all three major credit reporting bureaus and dispute each account. The credit bureau will launch an investigation and has 30 days to validate the account or it must be removed from your report by law.
Get Pre-Approval for a Mortgage
Once you have checked your credit and maximized your credit score, you will want to get pre-approval for a mortgage. Many experts say that being pre-approved for a loan before you find a home will help you create a budget, buy a home that is in your price range, and help lenders make faster decisions.
The benefits of pre-approval include:
• You’ll have information about what you can afford and can narrow your home search accordingly
• A seller will take your offer more seriously if you are a qualified, motivated buyer
• Lenders can determine if you qualify for any special programs that will enable you to afford a better home (particularly if you’re a first-time buyer)
Once you have confirmed your credit report is accurate and you have obtained pre-approval for a loan, you are ready to search for a real estate agent to help you with the rest of the process.