Get Your Credit in Shape for that New Home!
The new year and springtime are traditionally the peak periods for buying a home, and you’re thinking it might be the right time to get yourself a new place. If that’s the case, the time is perfect to make sure your credit is in the best shape possible.
In some ways getting your credit in shape for the purchase of a new home is a little like getting your body in shape for the summer. If you want to have that great Beach Body for the 4th of July, you don’t want to start your workout program on Memorial Day – it’s just not enough time! Similarly, if you want to be sure your credit’s in great shape to qualify for that home loan it’s best to start as soon as possible. Now, in fact!
1. Look at your credit reports
When it comes to the fitness of your credit it all starts with the credit reports from the three major credit bureaus – Equifax, Experian and TransUnion. Your credit reports are the basis for your credit score and qualification for financing your home. And a great way to do this is through a site the three bureaus have set-up for this purpose. The website AnnualCreditReport.com will actually provide you with a free copy of your current credit reports every 12-months.
Once you have your reports you’ll want to go through each of them pretty thoroughly looking for errors or misstatements regarding your credit history.
Focus on if there are any new or foreign looking accounts on the reports that shouldn’t be there. This could be an indication of identity fraud, someone using your personal information to open credit accounts. Then look at any outstanding balances. Do they seem right? Finally, are there any judgments, collections, or other activity that is wrong or appears to be misstated?
2. Remove errors from your reports
Unfortunately, if you’re like 1-in-5 Americans you will find some type of error on your credit report that could potentially make you less credit worthy if not corrected.
There are really two main ways to go about correcting any credit report errors you might have:
1. You can work with each of the three credit bureaus directly to dispute the error(s)
2. You can hire a professional firm that focuses on credit repair.
There are advantages and disadvantages for both. Hiring a credit repair firm with experience in this area should generally do a better job at getting those errors removed that can be removed, and they will likely be faster at getting results. But they also change a fee for their work. Doing it yourself, you can avoid the fee of a professional firm, but you could run the risk of not getting as much negative information corrected, and it consuming a lot of your personal time.
3. Pay your bills
Paying your bills on time is probably the best thing you can do to make sure your credit is in great shape! Unfortunately, they look at your overall payment history, not just the payments you’ll make between now and applying for that home loan. Trying to improve a bad payment history quickly is a little like trying to get that beach body by hitting the exercise bike hard over the weekend. It’s just not going to happen!
If your payment history is a little rough, just get back on track as soon as you can. And having a positive payment history trend will definitely be better than not.
4. Lower your balances
One thing you can do within a short timeframe that will have a big impact on getting your credit in shape is paying down any balances you might have on your credit accounts. About 30% of your credit score consists of your credit debt, or how much you owe vs how much available credit you have. Generally they want to see across each of your credit accounts that you owe less than 30% of the amount of your available credit. How they look at the amount owed is a little complicated, and FICO, the credit score people, does a nice job of explaining that in this article.
To get this area of your credit in shape it might just be a matter of tightening your belt on extra spending between now and when you were looking to buy that new home. Take that extra money and apply it to paying down your credit card and other accounts as much as possible. It might be a little tough at first, but the results will really payoff in better home loan terms.
5. Avoid new credit
This one might not seem to make sense on the surface, but opening one or more new credit accounts can be a negative factor in calculating your credit score. Why, you ask? Well, research has shown that consumers who open several credit accounts, especially if they don’t have a long credit history, are a much greater risk for having trouble meeting their payment obligations.
So, if at all possible – hold off on applying for any new credit before finding that new place. You will definitely put your credit in much better shape for when it really counts!
The Best Credit Shape of Your Life!
Okay, I hear ya, you’re probably thinking – Man, that’s a lot of work. Is it all really worth it? The short answer – Yes! The fact is, if your credit is in great shape you’ll have a lower interest rate for your home loan.
Here’s an example on a home loan of $200,000:
If you have an interest rate of 5% you will pay a whopping $186,512 in interest over a 30-year loan.
In contrast, with an interest rate of 3.5% you will pay $123,312 in interest.
That’s a savings of over $63,000!
So I would definitely say it pays – BIG TIME – to get your credit in shape when looking to buy a new home. And like working on that Beach Body for summer, you’ll have much better results when that time comes if you start early.