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It’s easy to fall in love with the idea of buying a home. You’ve got it all planned out: a five-bedroom home in yourfavorite neighborhood with a manicured lawn and—why not?—a nice pool.
Well, it may be the middle of winter now (we haven’t even tossed our Christmas trees yet, actually), but you’ve got a lot to do before prime home-shopping season this spring. So if you really want to land that dream home, you’d better get started now!
We’re kicking off our 2016 guideSo You WannaBuy aHouse?Each week, we’ll show you the next step to prep your finances, save for a down payment, find your dream home, and then finally ace the deal. (We also have a2016 guide for homesellers.)
Step 1 is to clean up your credit score, also called a FICO score—a simplified calculation of your history ofpaying back debts and making regular payments on loans. If you’re borrowing money to buy a home (as most do), lenders want to know you’ll paythembackin a timely manner,and a credit score is an easy estimate of those odds.
Here’s your crash course on thisall-important little number, and how to whip it into the best home-buying shape possible by spring.
Pull your credit report
There arethree major U.S. credit bureaus (Experian,Equifax, andTransUnion), and each releases its owncredit scores and reports (a more detailed historythat’s used to determine your score).Their scores should be roughly equivalent, although they do pull from different sources. For example, Experian considers on-time rent payments while TransUnion has detailed information about previousemployers.
To access these scores and reports, financial plannerBob ForrestofMutual of Omaharecommends usingAnnualCreditReport.com, where you can get a free copy of your report every 12 months from each credit-reporting company. It doesn’t include your credit score, though—you’ll have to go to each company for that, and pay a small fee.
Or check with your credit card company: Some, includingDiscover and Capital One, offer free accessto scores and reports,saysMichael Chadwick, owner ofChadwick Financial Advisorsin Unionville, CT.Once you’ve gotyour report,thoroughly reviewit page by page, particularly the“adverse accounts” section that details late payments and other slip-ups.
Assess where you stand
It’s simple: The better your credit history, the higher your score—and the better your opportunities for a home loan.The Federal Housing Administration requires a minimum credit score of 580 to permit a 3.5% down payment, and major lenders often require at least 620, if not more. So what can you do if your credit report is in less than shipshape? Don’t panic, there are waysto clean it up.
Disputeany errors
A 2013 Federal Trade Commission study found that5% of credit reports contain errorsthat can erroneously ding your score. Soif you spot any, start by sending a dispute letter to the bureau, providing as much documentation as possible, perFTC guidelines.You’ll also need to contacttheorganization that provided the bad intel, such asa bank or medical provider, and ask itto update the infowith the bureau.This may take a while, and you may need documentation to make your case. But once the bad info is removed, you should see a bump in yourscore.
Erase one-timemistakes
So you’ve made a late payment or two—who hasn’t? Call thecompany that registered the late payment and ask thatitbe removed from your record.“If you had an oopsy and missed just a payment or two, most companies will indeed tell their reporting division to remove this from your creditreport,” says Forrest. Granted, thiswon’t work if you have a history of late payments, butfor accidents and small errors, it’s an easy boost for your score.
Increase your limits
One no-brainer way to increase your credit standing is to simply pay off your debt. Not an option right now? Here’s a cool loophole: Ask your credit card companies to increase your credit limit instead. Thisimprovesyour debt-to-credit ratio, which compares how much you owe to how much you can borrow.
“Having $1,000 of credit card debt is bad if you have a limit of $1,500.It isn’t nearly as bad if your limit is $5,000,” Forrest says. The simple math: Although you owe the same amount, you’re usinga much smaller percentage of your available credit, which shines well on your borrowing practices.
Pay on time
Ifyou’re often late with payments, now’s the time tochange. Committo always paying your bills on time; consider signing up for automatic payments so it’sguaranteed toget done.
Give yourself time
Unfortunately, negative items (such as those habitually late or nonexistent payments) can stay on your report for up to seven years. The good news?Changing your habitsmakes a big difference inthe “payment history” segment of your report, which accounts for 35% of your score.That’s why it’s essential to start early so that you’re sitting pretty once you’reshopping for homes and find one that makes you swoon.
Once you’ve set your credit on a better path, it’s time to tackle the next major hurdle: saving for a down payment. Stayed tuned next week for the steps!
If you are ready and want to find out what the other steps are to get you that house you have been dreaming of, call me at 714-698-9655 or email me at Nomei@AgentWithAnAccent.com and let's get you moving forward.
