Congratulations on making the decision to buy a home! Owning your own home is a huge part of the American dream. For many, it means physical and financial independence.
Owning a home is a big step, and it can be scary to take on this new adventure. You may worry that your poor credit may hold you back from purchasing the home of your dreams. Unfortunately, the reality is that your bad credit can affect your ability to buy a house. Below is what you need to know about credit and buying your first home.
1. Your Credit Score Will Affect Your Financing
Your credit score will affect your ability to get a home loan and the type of rate you can get. It may also dictate how much you must have for your down payment as well.
As a rule, a score of 700 will get you much better rates compared to a credit score in the range of 660 to 680. Scores of 750 and above will give you access to some of the best rates on the market.
2. Know Where You Stand
If you have no idea what your credit score is, you should take some time to check. You can get your credit reports once a year for free online. Review these reports to get an idea of where you stand.
Is what is contained in the report accurate? If not, you may have some work to do before you apply for home loans.
3. Have the Right Number of Accounts
Many people don’t realize that you must have a minimum number of tradelines (or accounts) to qualify for a conventional or FHA loan. This could be a problem for someone that has no credit history at all. Opening a credit line with a major credit card company might be a good idea—but you should be sure you do it at least six months in advance of applying for any home loans.
4. Applying for Several Home Loans Could Hurt Your Credit
Every time you apply for a home loan, your lender will run your credit history. Each credit check is a “hard inquiry.” These inquiries will often damage your credit. Each credit check will decrease your score just a few points, but those points can add up quickly if you are “shopping around” for a reasonable rate.
While it’s a good idea to check several lending options for the best rate, you should do as much research as you can without a hard inquiry on your credit history. This will help you keep your credit score up while you look for a home loan that works for you.
5. Hold Off on Closing Old Accounts
Although it may be tempting to try to “fix” your credit by closing accounts to keep yourself from using credit cards and other revolving credit, just before you buy a home is no time to take this type of action. Closing accounts will reduce the overall amount of credit that you have available to you. Closing accounts increases the percentage of your credit that you are using and may shorten your whole credit history—and that can hurt your credit score.
Navigating the home buying process is hard enough without having to worry about your credit. Take some time to consider how you can boost your credit score before you start picking out homes.