With the rising cost of rent in Colorado Springs, you might be thinking this year is finally the year you're going to buy a home. This is an exciting time for anyone, but there's one big thing that stands between you and your dream of owning: a mortgage.
While you might feel financially ready to take on a mortgage, it's ultimately up to the lender to deem you responsible and financially stable. One of the ways they do that is to take a peek into your credit history. Maxing out your credit card in college or forgetting to pay a bill here and there might not seem like a big deal at the time, but it could come back to haunt you later in life when trying to apply for a large loan.
If you've been informed you have imperfect credit and need to boost your FICO score fast, here are a few things you can try:
Knowing Is Key: Check Your Credit Score
Knowing what your credit score is and where it needs to be is crucial. In most cases, the better your credit score is, the more likely you are to get a good interest rate on your loan. Those with fair credit will often end up with a higher interest rate, but still get approved. It's up to you to decide which is more important: buying a home now and paying more over time or waiting a few years until your credit has improved.
The obvious choice for many is to wait a year or two while their credit score improves. But know this: the average price of homes in Colorado Springs has increased be $30,000 in the last year alone.
A good lender and real estate agent can help you decide if it's worthwhile to take advantage of the housing market now, regardless of your interest rate.
If you're a military home buyers taking advantage of a VA loan, you're in luck! VA loans have a minimum credit score of 620, while the conventional loan requires a minimum of 740. Anything less than that and you're looking at a higher interest loan with additional fees.
Reduce The Amount You Owe
It might sound obvious, but simply paying down your current balances can go a long way. Nearly 30% of your FICO score is attributed to the amount you owe compared to the amount that's available to you. This is what's known as credit utilization. For example, if you owe $3,000 on a credit card that has a limit of $10,000, then you're using 30% of your available credit. The best way to use credit utilization to your advantage is to pay down your loans to around 1% of your credit utilization before your bank reports to the statement to the credit bureaus.
Start Paying Every Bill On Time
Timely bill payments are the most important factor when it comes to credit score. If you frequently miss a payment or are consistently late, suddenly paying all of them on-time is going to make a noticeable difference in as little as a few months. There's an app for that
Organization isn't everyone's strong point. Between the utilities, car loans, student loans, medical coverage, credit cards, and so on, it's not always easy to keep track of everything every month – you're gonna wanna make sure this is an — in DW especially when they all have different due dates.
Luckily, we live in the age of automation, so it's never been easier to set it and forget it. Most banks will let you set up recurring bill payments every month via online banking. There are also several third-party apps that track your bills and automatically pay them for you each month from a chosen account. Talk about streamlined!
Open A New Account
Applying for more credit might sound counter-intuitive, but it can help in two ways. First, it can increase your credit utilization by adding more available credit. Second, if it's different than your other existing forms of credit, then it can also improve the variety of your credit sources.
However, there are some caveats to be aware of. Only apply for one account, not several. Every time you apply for more credit, no matter what kind it is, you take a hit on your credit. So find one you like and try not to use it, if possible.
Become An Authorized User On Another Account
Being added as an authorized user on an account with great credit can actually boost your own. The full history of that account is added to your credit report almost immediately. So while you might only have recently been added, if the account has been around for awhile it will add its entire history to your list of managed accounts. In as little as a few days, this could give your credit rating the bump it needs to become eligible for a mortgage.
That said, make sure that whoever is adding you does in fact have great credit. If they also have less than perfect credit, it could actually do more harm than good.
How Your Credit Score Affect Home Buying
One of the biggest advantages, or obstacles, to home buying is your credit score. Mortgage lenders use your score to determine your credit worthiness, and decide whether to approve you for a mortgage. Credit scores affect home buying in a 3 important ways.
Scores gauge your financial management. If you have a high credit score, you probably pay all your bills on time, keep your credit card balances at a manageable level, and avoid opening too many lines of credit.
They show how much debt you owe. Large amounts of debt increases your debt-to-income ratio, which makes it more difficult to qualify for a mortgage loan. People with high credit scores usually have low amounts of debt, especially on their revolving accounts (credit cards).
Credit scores help lenders decide on loan terms. A high credit score helps you qualify for a lower interest rate and gives you more mortgage loan options. Over the course of an average 30-year mortgage, a high credit score can save you thousands of dollars in interest!
Have a question about mortgage or just want to learn more about the lending process? Check out our other mortgage articles or get in touch with us today and we'll connect you with a lending specialist.
Lauren Schneider, Real Estate Agent and Military Relocation Professional (MRP)
Lauren Schneider has lived in Colorado Springs for nearly 20 years and knows that the military is what keeps this town ticking, which is one of the reasons she's chosen to pursue her dream of helping military families with all of their homebuying needs. Learn more about Lauren or start your home search now.