Why does your credit score even matter when buying a home?
The reason it matters is because the credit score you have is how the bank decides what interest rate to lend to you, which then affects what your monthly payment is. If you are thinking of buying a house in the next twelve months this post is for you, because it can take time to build your credit. Some lenders have processes where they can go in and put in manual calculations based off of what you have available to potentially improve your credit score, but they are not always 100% correct. This is a great time to look at your finances and see what you can do about improving your credit score.
There have recently been changes made to the FHA loan, requiring a better credit score. They didn’t change the program as a whole, but a lot of lenders are requiring higher credit scores to do an FHA loan, because they want to ensure that they are protecting buyers and their interests. The easiest way to improve your credit score is to reduce the utilization on your credit cards. What I mean by that is, if you have a credit card only use 30% of that. Doing that will show that you have available balance, and that you are not using it. The three ways to do it are: 1.) Pay down your credit card to that amount, if you have the available cash. This is the easiest and quickest way to do it.
2.) Up your credit balance. Do NOT do this if you are looking to buy a home within the next 3 months. This is to be used as a long-term plan if you’re buying in 12 months because it gives you enough time to show that you didn’t use the balance that you raised it to.
For example, if your credit card right now is $1000, and you’re maxed out at $1000, that actually gives you an awful credit score because it is showing that you are using the most amount of credit that you have. So, if you up it to $3000 and don’t change how much you are using, it now shows that you have a 30% utilization rate, which is good. 3.) Make sure that you are making your mortgage payment. This is actually weighted heavier than other usages of your credit. Meaning that if you drop your mortgage payment, it will drop your score drastically. It shows the lender that you are less likely to pay one of your staples, being food shelter and utilities, which are the things that you typically cover before you are concerned about other things. Now with this deferment coming out there are questions of will it, or will it not hurt your credit. I have read multiple sources, some say it won’t hurt your credit, others say yes it will hurt your credit but not as bad as if you don’t have a mortgage payment or if you miss it entirely. The deferment will be reported as a deferment, which is a level of hurting your credit score. Time will tell on this one but if at all possible, make your mortgage payments, because if not it will hurt your credit quite a bit. If you are thinking about buying, knowing where your credit score is now, and improving it by talking to a lender and figuring out where the minimum thresholds are to get you over is important. 740 and above is a great credit score and you’ll get the best interest rates of the day with a 740. If you are at a 720 it might be worth it to write down the scenarios and see if you can improve your credit score. Late payments are always going to hurt your credit score. If you have any judgements or collections, the time to look at that is 12 months before you’re ready to buy to see if it’s better to pay that off, or ask for it to be removed, but the more time you have the better. If you’re not buying in 2020, and thinking about 2021, this is a great time to check out your credit and review everything. I hope you learned something new and if you are looking to buy now and you want to go over what has changed in the market, please feel free to reach out to me.