Improve Your Credit Before You Start Looking for a New Home

Buying a house too soon can backfire. If you don’t get your credit in shape first, you can pay more than you have to. Slowing down and improving your credit now can pay off in the long run.

Good Credit Can Save You Money on Your Mortgage

Credit bureaus calculate your credit scores based on several factors, including your payment history, the amount of debt you have, the length of your credit history, your mix of account types, and whether you’ve applied for credit recently. If you’ve had credit cards and/or loans, you’ve consistently paid the bills on time, and you’ve kept your debt at a moderate level, you’ll have a good credit score.

Your credit score helps lenders figure out if you’re able to manage debt responsibly. If you have a high score, a lender will be likely to approve your request for a mortgage and give you a loan with a competitive interest rate.

If you have bad credit, on the other hand, you might apply for loans through several lenders and keep getting rejected. If you’re able to secure a mortgage, it might have a high interest rate, or you might have to make a large down payment.

Even a small difference in interest rates can have a profound impact. If you get a mortgage with a lower rate, you’ll have lower monthly payments, and you can pay tens of thousands of dollars less in interest over the life of the loan. You’ll have more money to put toward things like maintenance, retirement, and vacations and fewer sleepless nights.

Your Credit Can Affect Your Insurance Rates

Your credit history can also impact your homeowners insurance premiums. In most states, insurers calculate credit-based insurance scores. Customers with higher scores tend to have significantly lower premiums. Insurers reason that homeowners who manage their finances well will have the funds necessary to take care of their homes and will be less likely to file insurance claims.

How to Improve Your Credit

If your credit needs work, start by identifying the problem(s). Then you’ll be able to focus on solutions.

If you need to reduce your debt, consider working extra hours, taking on a side gig, selling things you don’t need, or using a balance transfer or loan to reduce your interest rates and consolidate your payments.

Calculate your credit utilization ratio (the percentage of your available credit that you’re using). Add up the balances on all your credit cards. Then add up the credit limits on all your cards. Divide the first number by the second number and multiply by 100 to get a percentage. Aim to get that number down to 30% or less.

Request copies of your credit reports from each of the three credit bureaus (Equifax, Experian, and TransUnion) and check them carefully for mistakes. Sometimes information from one person winds up on someone else’s report or a debt is paid off but doesn’t get reported to a credit bureau. If something doesn’t look right, contact the credit bureau to address it.

Take the Time to Boost Your Credit

If your credit needs work, don’t rush to buy a house. Reducing your debt load and improving your credit will make you less risky in the eyes of lenders and homeowners insurance companies. You’ll qualify for better rates and have less stress.

In Financial Freedom Voyage’s First-Time Homebuyer Masterclass, you can learn more about how credit can affect your plans to buy a house, how to compare mortgages, and much more. When you finish the course, you’ll receive a certificate of completion that you can send to your lender, housing counseling agency, or down payment assistance program. It might even cover the cost of the course. Enroll today.

Please share this blog on social media and/or send it to someone you know who is thinking about buying a house this year.