Buying a home is a really big deal. Everybody knows this, and we have written about it in so many of our posts. A home is probably the most expensive thing you will ever buy in your life, and the mortgage you take out to buy it is probably the largest debt you will ever sign up for. While houses are inevitably expensive, there are some things that you can do to at least bring the final price tag down a little bit.
The price tag on the house is not necessarily what you will pay, either. There are other costs involved, like the closing costs and the interest you will pay on your mortgage. Closing costs, which are the fees that get paid to the realtors, are typically covered by the seller. However, the interest you pay on your mortgage is all yours, and there isn’t much you can do to get away from it. One thing you can do, though, is to increase your credit score as much as possible before applying for your mortgage. Mortgage lenders look at your FICO credit score to determine the amounts and interest rates that they are willing to lend you. Increasing your credit score can ultimately lead to you getting a better interest rate on your mortgage, leading to potentially thousands of dollars of savings. This post will outline seven of the best ways to improve your credit score to buy a home.
1. Pay Down Any Existing Debts or Credit Card Balances
This is the biggest thing that you can do to lower your credit score. Demonstrating that you can pay down any balances you have on loans and can pay off your monthly credit card bill goes a long way in improving your credit score, ultimately leading to lower interest rates on your mortgage. Mortgage lenders measure this metric by checking your credit utilization rate, which is the ratio of how much credit you are using out of all of the credit you are allowed to use. Usually, this means that if you are using more than 30% of your credit, your score will drop. To put that into perspective, that means if you have $5,000 in total credit allowance on your credit cards, you should try to keep your balance under $1,500 and if you have $10,000 in total credit allowance, you should try to keep your balance under $3,000.
Now, this is easier said than done, right? Some people may be in a financial position to where they can pay down their bills every month, while other people only dream of a situation like that. Don’t worry! Your mortgage rate will not be sky high just because you are not able to pay off your monthly bills. However, the more you can pay off, the better. Mortgage lenders just want to see that you are not already strapped for cash, because they will not want to give you a several hundred-thousand-dollar loan if you are already lagging behind on paying your credit card balances or car payments. Focus on spending less in order to drop your credit utilization rate and try to pay down credit card balances as much as possible in order to make your credit background as attractive as possible.
2. Set Up Automatic Payments for All Monthly Bills
The last point was about showing that you are not strapped for cash and can be trusted with a massive loan. This point is about proving to mortgage lenders that you are trustworthy and will make timely payments on your mortgage. At the end of the day, banks give loans in order to make money. If you are not able to make your monthly payments, the bank loses money. For this reason, mortgage lenders will give the most favorable rates to the clients they think they can rely on to make their payments every month and will give worse rates to the folks they expect to need to chase after. It really is that simple in this sense!
In order to show that you can be trusted to make your monthly payments on time, make your monthly payments on time! Does that sound silly? If you can make the payments that you currently owe on time, it helps mortgage lenders to trust that you will be able to continue to do that with their loan, too. We are lucky to live in an era where checks getting lost in the mail is a thing of history. Now that we have electronic bill paying, it is easier than ever to make payments on time. For that reason, missing payments probably penalizes you more than ever, too. If you want to make sure that you make your monthly payments on time and ultimately increase your credit score, sign up for monthly automatic payments. For utility bills, loans, and credit card bills, enrolling in automatic payments ensures that you never miss a payment deadline and elevate your credit score as much as possible. It is easy and only takes a couple of minutes.
3. Keep Old Credit Accounts Open
This is one of the easiest things you can do to increase your credit score, because it literally requires inaction, not action. One important determinant of your credit score is the age of your oldest credit account, which is another way to say how old your first credit card account is. If you opened a student credit card account in college and haven’t cancelled it yet, it is actually one of the greatest assets you have for your credit score now – even if that card’s credit limit is only $500. Your FICO credit score is calculated partly by checking the age of your oldest credit card to show how long of a credit history you have. The sad part is that as soon as you close your oldest credit card, it no longer counts in your favor. So, if you opened a card in college or shortly thereafter, keep it open!
The only time that you should consider closing your oldest line of credit is if it charges an annual fee that you do not want to pay. If your oldest credit card is costing you money and you are not using it, you should probably get rid of it. However, if there is no annual fee, there is no reason to cancel it! If you want to cancel it out of self-discipline purposes, don’t. Try hiding it away in a drawer or a safe instead. Keeping your first credit account open costs you absolutely nothing (as long as there is no annual fee) and it requires no action on your part. This is the easiest tip on this list!
4. Monitor Your Identity and Credit Report
Your identity is pretty important. After all, it is what make you, you! Unfortunately, we live in a time where identity theft is more common than ever, and it is very hard to protect our identity and our private information. There are hackers that are capable of cracking your code in an instant, gaining access to your personal information, your accounts, and most relevant to the point of this post, your credit cards. Being a victim of identity theft is a horrible thing. As if it were not already bad enough, having your identity stolen can tank your credit score, too. For this reason, among many others, it is very important to set up some sort of credit monitoring program or software to keep an eye out for your identity’s integrity. The good news is that there are countless options these days and protecting your identity can be easy if you are willing to pay for it.
Why does identity theft hurt your credit score? This is simple. Identity theft can do two major things to hurt your credit score and ultimately leave you with a not so good interest rate on your mortgage. Firstly, if someone starts fraudulently charging your credit cards all over the place, it looks like you are doing it. Lenders’ first thought is not “wow, this person must be a victim of identity theft!” They will see erratic spending patterns in your credit history which are not a great thing for your mortgage rate. Secondly, having questionable information in your credit history puts red flags all over your credit report. Even if it was not you that was engaging in suspicious activities with your credit cards, the mortgage lenders have no way of knowing that. Your application simply looks riskier, and lenders cover risk by charging higher interest rates.
5. Do Not Open New Credit Cards or Take on New Debt
This one is very important because it is very time-sensitive. Taking on new debts and opening new credit cards are not inherently bad things, but they are things that you should absolutely avoid until you have signed your mortgage documents. This is because of many reasons. Firstly, opening up new lines of credit or applying for new credit cards reduces your credit score. This is just built into the formula that is used to calculate your credit score. While the negative credit score effects of opening up new credit cards disappear fairly quickly, they will negatively impact your mortgage terms in the meantime. Unless there is an absolute need to open up a new credit card immediately, wait until after you have signed the mortgage papers.
Secondly, mortgage lenders do not want to see that you owe other lenders money. It just doesn’t look good. While taking out loans is a natural part of life, lenders do not want to see that you are acquiring new debt commitments left and right. While the effects of your car loan that you began two years ago will be minimal, the effects of a car loan started two months ago would be significant. This is largely because you have not yet proven that you are capable of making the payments on that loan, and adding an even bigger loan on top of it looks even riskier from the mortgage lender’s perspective. While buying a car and a house at the same time are probably not a good idea for most people anyway, it is still good to know that there are ramifications to taking on new debts or opening up new lines of credit right before applying for a mortgage.
6. Budget Effectively And Smooth Out Your Consumption
This is a general tip that can be applied across the board, not just when you are looking to get a mortgage to buy a house. However, it is so important to the homebuying process that we wrote an entire post about it a couple months ago. Budgeting is so necessary, and it can save you a lot of headaches over the years. Buying a house is one of the largest financial commitments you will ever make, and it is paramount that you understand your financial situation and see clearly how the mortgage payments will fit into your budget. Your mortgage is not only the biggest loan you will probably take out in your life, but it is also probably the biggest bill you will be paying every month – and you will be paying it for a long time. Since your mortgage will be such a big part of your financial picture for so long, it only makes sense to plan diligently around it, right?
This post is not about budgeting, though. It is about lowering your credit score in order to get better terms on your mortgage. This point is included in the list because smoothing out your consumption leads to more consistent credit patterns which ultimately look much better on your credit report. If a mortgage lender sees smoothed consumption and consistent spending patterns, they may be inspired to offer you more competitive rates.
Thanks for reading our post with 6 ways to improve your credit score to buy a home. Hopefully you learned about some strategic steps that you can take to lower your credit score and ultimately land more competitive rates and terms on your mortgage. While your payments will inevitably be large – it is the biggest financial commitment of your life, after all – you can do some things to make them as manageable as possible. If you enjoyed this post and are looking for more tips about buying a home, including facts about HOAs, ways to save money on your utility bills, and whether or not a realtor is really necessary, be sure to check out our other posts. Otherwise, thanks for reading and have a wonderful day!
If you visit Myrtle Beach or any other place in South Carolina and fall in love, we’re here to help. We at The Boyd Team are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.
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Written by Greg
