It Takes Time and Effort to Build Credit Before Buying a House

There are so many factors that go into buying a home, but the initial step begins with an honest evaluation of a borrower’s credit score. Why is it so crucial to start here? This is because this score is a key piece of data that lenders look at prior to making the decision to approve the prospective homeowner for a mortgage loan.

In short, before lenders give the green light for borrowers to purchase their dream home, they scrutinize the homebuyers’ credit histories. So it makes sense that the higher the credit scores are, the better the homebuyers’ chances of qualifying for a mortgage. This is also why, on the part of the borrowers, they should ideally have a truthful and thorough assessment of their financial well-being prior to beginning the house purchase process.  

After looking at the borrower’s credit, the lender will compute an interest rate and the appropriate down payment for the loan. The long-term repercussion here is that the score could determine how much the cost will be for the borrower over the life of the loan. Mortgage lenders usually equate a solid credit history to a trustworthy borrower. In other words, the higher one’s credit score is, the lower the interest rate will be. Having a low credit score — or even having no credit at all — can most certainly hinder homeownership, or at the very least, make the costs of buying a home more expensive.

The Preparation Process

In preparing to apply for a home loan, prospective homeowners need to review their credit report before doing so. What exactly is a credit report? This report has all the data utilized to calculate the borrowers’ credit score — which ranges between 300 and 850 — and where borrowers fall on this scale provides lenders a way to objectively assess their credit risk. The report will give homebuyers a glimpse as to whether they need to improve their credit score. 

Although boosting one’s credit is not an instant process, borrowers can take some non-complicated steps to better their financial health and increase the likelihood of being approved for a home loan. These moves could also make the homeownership process less stressful and costly.

According to HousingWire, one way to get a better score is to pay down one’s balances since lenders scrutinize what percentage of borrowers’ total credit line they are using. Credit utilization comprises close to a third of one’s credit score. There are two ways to get a better credit utilization rate: borrowers can lower their balances or they can request for an increase in their credit line. A 30% or less credit utilization rate is ideal. Credit scores also rely on a borrower’s payment history, which comprises 35% of a potential homebuyer’s total score. 

Another way is if homebuyers have a spouse or loved one who has good credit and a history of on-time payments, they can ask to be added as an “authorized user” on their account. 

There is also the probability that a lowered score is due to errors on the credit report. These mistakes could be issues that involve inaccurate late payments or incorrect account balances, among other factors. Prospective homeowners should look at their credit report every few months and check whether there are potential errors on the report and inform the credit bureau right away. Making sure credit reports do not have errors could improve borrowers’ score considerably.

A solid history as a renter could also serve as a convincing credit reference when borrowers apply for a mortgage, if the regular rental payments can be verified by a management company or landlord. Paying rent with a check or debit card payments might be good practice. Bank statements recording these consistent payments can be used as evidence of a borrower’s reliability. 

Although it is key to build up one’s credit, not all credit cards boost one’s profile the same way. For instance, department store credit cards typically have high interest rates. Staying with a trusted financial institution might be the best option for those who want to improve their credit profile in order to buy a house. 

Additionally, keeping a low balance on credit cards is another effective way to make one’s credit better. Maxing out credit cards can potentially hurt one’s credit rating. This is the case even if the borrower has never missed a payment. Setting up an automatic payment on bills and debt payments can help in ensuring that borrowers do not miss any of their due dates.

Reducing Debt Is Also Important

Making a plan to reduce debt is important. This involves examining one’s income and budget to find out how long it will take to pay off one’s debt. Ideally borrowers should pay down their debts with the highest interest rates first, while still paying more than the minimum payment amount on their other debt.

These steps are essential because aside from borrowers’ credit score, lenders also examine their debt-to-income ratio (DTI). The DTI is a mathematical formula that compares how much one’s debt payment is to the homebuyer’s actual income. Expressed as a percentage, the DTI is utilized by lenders to find out if borrowers have the capacity to manage their monthly mortgage payment. A low DTI is ideal — it demonstrates that homebuyers have a good balance between their debt and income. However, if this percentage is high, then it can also mean that the borrower has an unhealthy amount of debt.

Good Credit Is Not Easy

It is never easy or quick. Improving one’s credit and becoming financially healthy do not happen overnight. It takes time, effort and a lot of thought to get the skills and gather the know-how that is necessary to make sound financial decisions. 

Increasing borrower’s score to make them eligible for a mortgage loan also takes a while. Six months to a year is likely the most realistic time period to optimize one’s credit score. Borrowers should be patient and remember that the ultimate goal — homeownership — is worth it.