First Time Home Buyer Info: Credit Scores

In the last article “Obtaining Financing” we talked a little bit about the importance of checking your own credit score before applying for a home loan. There are many reasons why this is a good a idea and why you should do it sooner rather than later. But first you should understand how your credit score is determined.

Your credit score is based on several factors including:

Credit history (how long you have had credit) – The longer the time the better your score

Debt ratio – How much available credit you have verses how much you have used. The higher the difference between the two, will give you a higher score.

Payment history – Do you pay your debt on time? If you have delinquent payments your credit score will drop.

Credit Inquiries – Credit reporting agencies don’t like it when people ask for more credit. Every time you apply for a new credit card (including store credit) or loan your credit score drops anywhere from 5 to 10 points. This can add up quickly. So when you think you ready to buy your first home, do not open any new credit accounts for at least one year.

Now that you know what goes into creating your credit score, here are the two main reasons you should check your report well in advance of obtaining financing for your first home.

1. Mistakes - it is not uncommon for your credit report to have faulty information. Sometimes the creditors never report that you actually paid off that Macy’s credit card and sometimes the reason is even more sinister. Either way you should know what the bank will be looking at and it takes time to correct bad information.  If you notice any mistakes on your credit report call the credit reporting agency first ( Experian, TransUnion, and Equifax) then start to call the actual creditors (Visa, MasterCard, Target, Etc.)

2. Low Credit Score – If your credit score is under 650 then it is a good idea to try and raise it before your apply for your home loan. The higher your score the easier it will be for you to get financing for your first home and your will have access to better interest rates.

In general creditors report every 30 days.  So pay down any existing debt right away to lower your debt to income ratio. If you have been late on few payments you will have to be sure to pay everything on time for at least 6 months.

Credit scores can be confusing, but atleast understanding the basics will get your prepared for buying your first home.

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