If you want to buy a house, condo, or some other kind of real estate, you should know how your credit score will affect the process. Most people who buy property don't have enough cash in the bank to pay for it all with cash. Most of us instead need to get a loan (also called a mortgage) from a bank or a mortgage broker in order to buy real estate.
Part of the cost of a loan is based on how good a person's credit is. In other words, the lender wants to know how likely it is that the loan will be paid back on time and in full. A person's credit worthiness in the United States is based on their credit score, which is also called a FICO score.
Credit scores are meant to show how likely a person is to pay back debts. They range from 300 to 850. In the U.S., the middle FICO score is 723. Lenders look at your credit score to figure out how much risk they are taking by giving you money. Lenders decide if you can get a loan or not based on your FICO score and other things like your income and debt. If you can get a loan, your interest rate and credit limit will be based on your FICO score and other things like your income and debt. If a loan applicant's credit score is low, banks and other places that lend money may turn them down or charge them higher interest rates.
Since people with better credit scores are less likely to not pay back their loans, lenders charge them less interest. So, if you want to buy a house or condo, it would be a good idea to improve your credit score before you do. Read on to find out how to get a copy of your credit report and what you can do to improve your credit score.
Three different credit reporting agencies figure out and keep track of your credit score. These things:
- Trans Union: (800) 888-4213 or http://www.transunion.com
- Experian: http://www.experian.com or (888) 397-3742.
- Equifax: http://www.equifax.com or (800) 685-1111
Not every company that gives credit, like a credit card company, mortgage company, or car loan company, reports to all three credit agencies. Because of this, a person's FICO score can vary from one agency to the next. Because of this, most home loan lenders use the middle score to decide if you are a good credit risk. Everyone has the right to get a copy of their credit report. To do this, go to any of the above-mentioned sites and ask for a credit report that includes information from all of the agencies.
The credit agencies use a complicated formula to figure out your FICO score. For each of the five categories below, information is collected, weighted, and added together.
- How long you've had credit - 15%
- 30 percent of the total amount owned
- Type of credit used - 10%
- History of payments - 35%
- New credit: 10% interest
Let's look at what you can do to get better in each of these areas.
PAYMENT HISTORY
To improve your record of paying bills,
- Bring bills that are past due up to date and keep them that way.
- If you can't pay on time, talk to your creditors and set up a payment plan so that they don't have to report a late payment.
- Pay your bills on time every time.
- If you have debt, talk to a trusted credit counsellor who can help you handle your money in a responsible way.
TOTAL OF WHAT IS DUE
- If the credit card accounts you don't use show that you have a good credit history, keep them open so they can help you get more credit.
- Pay off your debts to keep your ratio of debt to credit low. Don't mess with it.
LENGTH OF CREDIT HISTORY
Your credit history can only get better with time. Don't start a lot of new credit accounts all at once. To build up a good credit score, you should pay off old accounts that you don't use.
WAYS TO GET CREDIT
- Your credit score usually goes up if you have different kinds of accounts, like credit cards, retail accounts, instalment loans, and so on.
But don't make new accounts just so you can have more than one; only apply when you really need it.
MANAGING NEW CREDIT
- Don't make too many inquiries into your credit report, as they can hurt your credit score. Open as few new accounts as you can and try to make small purchases that you can pay for on time.
ONE LAST THOUGHT
There are often mistakes on credit reports. For instance, you might find a charge on your credit report that you didn't make or that belongs to someone else. Because of these things, it's a good idea to get a copy of your credit report every year, look it over carefully for mistakes, and follow the dispute resolution process carefully if you find mistakes.
Buying a home is a big decision that will affect you for the rest of your life. If you take steps to improve your credit score before you start looking for a home, you will not only get a better mortgage rate, but you will also enjoy the process of buying a home.
