Buying a home is a huge life event that’s worth celebrating. However, if you’re not fully prepared for what the process entails, it may not be the amazing event you had hoped for.
The first step in buying a home is checking your credit. Your credit score will impact your path forward in a variety of ways.
How Credit Impacts Your Mortgage
Whether you work with a mortgage broker or a bank, your credit score will be the first thing they look at when evaluating your eligibility. Your credit score will directly impact both your mortgage pre-approval amount and your interest. If your credit is too low, you won’t be eligible for a mortgage at all.
For these reasons, it’s vital to pull your credit report before heading to the bank. This exercise will give you a better idea of your eligibility and areas that offer room for improvement before applying for a mortgage.
What to Look for on Your Credit Report
When reviewing your credit report, there are two main areas of focus: accuracy and negative items. Accuracy pertains to the correctness of the information on the report. If there’s anything that you think shouldn’t be attributed to your credit, you should file a dispute. This could pertain to anything from an incorrect name to incorrect dates.
There may also be negative items that are legitimate— for example if you have collections showing up on your credit report for something you didn’t pay. Even so, these negative items are bound by a statute of limitations and should be investigated.
If you see repetitive patterns, such as late payments or bounced checks, you should focus on these areas to improve your score.
Myth: Pulling Credit Reports Decreases Your Score
One of the reasons people are hesitant to pull their credit reports is due to a misconception about how it impacts their scores. The idea that checking your credit score causes it to go down is a myth rooted in truth.
There are credit inquiries known as hard pulls and soft pulls. A soft pull is when you check your score for posterity as a simple update on your financial health. A hard pull is when a loan provider (such as a car dealer or mortgage broker) pulls a detailed credit report with the intention of giving you a loan. The hard pull impacts your credit score because it indicates that you need to borrow money.
Pulling your credit score preemptively will help you protect your credit score before you experience a hard pull.
Tips for Improving Your Credit Score
When trying to buy a home, a credit score of 680 or higher is ideal. However, most conventional mortgages will make allowances for credit scores of 620 and above. While you can get a mortgage with a score in the 500s, it often necessitates a higher down payment and interest rate, which will cost you tens of thousands of dollars more.
As such, it’s worth spending some time improving your mortgage score before you try to buy a home. Some ways to start improving your mortgage score include:
- Paying all bills on time
- Paying down credit cards
- Disputing negative items
- Keeping unused credit open
- Limit hard pulls of credit score
It can take months or even years to improve your credit score. However, the potential for long-term savings is well worth the wait. Purchasing a home is a huge investment, and if your financial health isn’t in order beforehand, it can be a huge mistake.
Take some time to review your credit report and make changes to improve your long-term spending habits so that you can buy and pay for the home you want.