Loan Officer | NMLS #320998
Branch NMLS #1646074
Posted On March 21, 2018
Lenders use a home buyer’s credit score to determine credit risk and evaluate their ability to repay a loan. A good FICO credit score is instrumental to securing a mortgage loan and, in some cases, getting a better interest rate. Most mortgage professionals suggest potential home buyers start credit repair at least six months to a year before shopping for a home. Remember, each hard credit pull, like the kind needed for a new line of credit like a mortgage, will impact the credit score! A little credit repair now goes a long way when it comes to a high-dollar purchase later.
When was the last time you checked your credit score? While a hard credit pull, like a pull from a lender when applying for a line of credit, will impact a credit score, there are numerous free services that allow consumers to check credit scores and get a better idea of their buying power. Websites like FreeCreditReport.com and Credit Karma provide periodic estimates of the user’s credit score, and some credit card companies like Discover and American Express, estimate credit scores for customers on monthly bills. These credit report services can differ from the official FICO credit score, but they can give a potential home buyer a better idea of what to expect when they start the mortgage prequalification or preapproval process.
When a consumer misses a payment on a bill, that account becomes delinquent. However, most delinquencies are not reported to the credit bureaus until the second payment is missed, and the consumer becomes 30 days delinquent. Delinquencies can range from carrying a high balance on a credit card for multiple months, to something as simple as a gym membership or subscription service that was not properly cancelled. To avoid delinquencies, especially incorrect delinquencies, potential home buyers should monitor their credit report regularly. If you believe a delinquency is incorrect or paid, correct the error by contacting the business or institution. A 30-day late payment can drop a score by as many as 60 to 80 points and payment history accounts for 35% of the FICO credit score.
Build a Credit History
Although tales of excessive credit card debt might make some consumers wary about opening new credit cards, no credit card history will also hurt the credit score. Length of credit history makes up 10% of the FICO credit score. Responsible credit use can help the potential home buyer build a positive credit score. If you have not established a credit history, consider opening a credit card, using between 10% and 30% of the credit limit, and paying the balance in full each month. While it is not advised to open multiple lines of credit in quick succession, because of the impact of hard credit pulls, opening and maintaining an account before shopping for a home will start to build credit history.
Improving your credit score before shopping for a home can help you secure a better loan, and improve the ease of the mortgage transaction. Simple steps like regularly monitoring your credit report, establishing a positive credit history, and correcting delinquencies in advance can put you in a better buying position when you are ready to buy a new home. Before making any home financing decisions, it is best to consult a financial advisor or mortgage professional.