You’ve hit an age where the idea of buying a house is becoming increasingly appealing. You have a good job and you make good money, but your credit rating/scoreisn’t great. What do you do? Do you hold off until it’s better? What role exactly does credit play in buying a house? And how can you make your credit work for you?
To start understanding this, first let’s look at what your credit score is and how it’s calculated.
How is Your Credit Score Calculated?
Your credit score is a number that indicates to creditors or loan officers what your credit or loan risk level is. The lower your credit score, the greater your risk. So, someone with a credit score of 200 for example would be considered very high risk, while someone with a score of 800 would be consider very low risk. It is systematically calculated and takes into account things like number of accounts you have open, account diversity, the length of time each account has been open, available credit to debt ratio, pervious late payments, previous defaults, number of previous credit inquiries, etc.
The higher your credit score is, the better the likelihood is of you being approved for a home loan quickly. Additionally, a higher credit score can help you qualify for lower interests rates when it comes to loan repayment. Keep in mind before applying for a loan however, the number of loans you apply for can also affect your credit negatively, so applying before you are sure you are ready should be approached with caution.
How to Increase Your Credit Score
If you find yourself in the position of wishing to give your credit score a bit of a boost before you apply for a loan, there are several actions you can take right away. First, make sure you’ve paid off all defaults in full.
Secondly, ensure you are making payments on time and if possible, make payments that are higher than your minimums required in order to adjust your debt to credit ratio. The more available credit and funds you have, the better your credit score will be.
Thirdly, do not close accounts you’ve paid off. Instead, use those accounts and pay them off at the end of each month so interest doesn’t’t accrue. Having older accounts you regularly use shows you have a good history and track record of managing your money. And finally, stop applying for lines of credit and loans such as credit cards for the points, personal loans and car loans.
As mentioned above, the more you inquire about these things, the more your credit score will be affected.
If however, after taking all these measures, your score still isn’t where you would like it to be, don’t fret. There are still options for home loans available to you. You can go through a lender that doesn’t’t use your credit score as the main determining factor. There are those out there who much prefer things such as stability at your current job and income level.
Also how large a deposit you are able to put down can be a determining factor in helping you get a home loan, as well as your banking history, specifically in regards to how regularly you contribute to a savings account and how much you actually have saved.
Preparing to buy a home can feel a bit challenging and overwhelming at times. However, the key is to take it one step at a time. With effort, you can be sure you will get there!
It just takes attention to finances which is a skill that can be learned and mastered if enough practice is given to it. And soon enough, you will find yourself on the door step of your new home.