Why Credit Matters When Buying a House
Buying a house is one of
the biggest financial decisions you will ever make. It requires a lot of
planning, saving, and research. But before you start looking for your dream
home, you need to make sure your credit is in good shape. Trellis for 48 years
has supported individuals and families on the path to homeownership through
learning, lending and the building of affordable homes. Knowing why your credit score matters and how
to improve it is one important part of that journey.
Your credit score is a
number that reflects your history of borrowing and repaying money. It shows how
responsible you are with your finances and how likely you are to pay back your
debts on time. Your credit score affects many aspects of your home buying
process, such as:
- Your eligibility for a mortgage. Lenders use your credit score to determine if you qualify for a
loan, how much they are willing to lend you, and what interest rate they
will charge you. A higher credit score means you have a lower risk of
defaulting on your loan, so you can get better terms and save money on
- Your down payment requirement. Some loan
programs, such as FHA loans, have lower credit score requirements than
conventional loans, but they may require a higher down payment. A higher
down payment means you need more cash upfront, which can be challenging
for some buyers.
- Your closing costs. Closing costs
are the fees and expenses that you pay when you finalize your home
purchase. They can include appraisal fees, title insurance, origination
fees, and more. Some of these costs may vary depending on your credit
score and the type of loan you choose.
- Your homeowners insurance premium. Homeowners insurance is a policy that protects your home and
belongings from damage or loss due to fire, theft, natural disasters, and
other risks. Your credit score may affect how much you pay for your
homeowners insurance, as insurers may consider you more or less likely to
file a claim based on your credit history.
As you can see, your
credit score can have a significant impact on your home buying experience.
That’s why it’s important to check your credit report and score before you
start shopping for a house. You can get a free copy of your credit report from
each of the three major credit bureaus (Equifax, Experian, and TransUnion) once
every 12 months at [AnnualCreditReport.com]. You can also get your credit score
from various sources, such as your bank, credit card issuer, or online service.
If your credit score is
not as high as you would like it to be, don’t worry. There are steps you can
take to improve it over time, such as:
- Paying your bills on time. Your payment
history is the most important factor in your credit score, so make sure
you pay all your bills by their due dates every month. If you have trouble
remembering or managing your payments, consider setting up automatic
payments or reminders.
- Reducing your debt. Your credit
utilization ratio is the percentage of your available credit that you are
using. It’s calculated by dividing your total balances by your total
credit limits. A lower credit utilization ratio means you are using less
of your credit and have more room for borrowing, which can boost your
credit score. Try to keep your credit utilization ratio below 30% by
paying down your debt or increasing your credit limits.
- Keeping your accounts open. The length of
your credit history is another factor in your credit score. It shows how
long you have been using credit and how well you have managed it over
time. Closing an old account can shorten your credit history and lower
your score, so keep your accounts open unless you have a good reason to
- Applying for new credit sparingly. Every time you apply for new credit, the lender will perform a
hard inquiry on your credit report, which can temporarily lower your score
by a few points. Too many hard inquiries in a short period of time can
indicate that you are desperate for credit or taking on too much debt,
which can hurt your score and scare off potential lenders. Only apply for
new credit when you really need it and shop around for the best rates
within a short time frame (usually 14 to 45 days) to minimize the impact
of hard inquiries.
- Disputing any errors. Sometimes,
your credit report may contain inaccurate or outdated information that can
negatively affect your score. For example, there may be accounts that
don’t belong to you, payments that were reported late when they were not,
or balances that are higher than they should be. If you find any errors on
your credit report, you should dispute them with the credit bureau and the
creditor as soon as possible to get them corrected or removed.
By following these tips,
you can improve your credit score and increase your chances of getting approved
for a mortgage with favorable terms. Remember that building good credit takes
time and patience, so don’t expect instant results or give up easily. With
consistent effort and discipline, you can achieve your goal of buying a house
and enjoy the benefits of homeownership.