When you are preparing to buy a house, you might not consider building credit a top priority. Besides, you are most likely thinking of the perfect location, the size of your house, or the right decor. However, building credit should be your highest priority when you make the decision to buy a house. In this article, you'll find out how to build your credit while searching for your future dream home.
Review your credit report
One of the first things that a mortgage officer will do is check your credit score and review your credit history. Often, new homebuyers are surprised to find small errors placed on their credit report that can drag down their score. A higher credit score can influence a lender's decision to qualify you for a loan. You can stay one step ahead by checking your credit report at least once a year to look for discrepancies.
Keep your monthly expenses low
Another major factor besides your credit score is your "debt-to-income" ratio.
This ratio is calculated by the amount of fixed recurring expenses versus the amount of income you receive each month. As a best practice, try to keep your credit balances low to avoid high monthly payments. Online budgeting apps are a quick and convenient way to keep track of your expenses. Each month, review unnecessary fixed costs like unused subscriptions and consider cutting them from your budget.
Keep your credit accounts open
The most commonly used credit model is FICO which calculates up to 15% of your credit score from the length of your credit history. Whenever possible, avoid closing any open credit accounts before applying for a mortgage. The best situation is to have a long credit history on your accounts that show on time payments. Doing this can positively contribute up to 35% of your credit score.
Avoid opening new credit accounts
New credit counts towards 10% of your credit score. Avoid opening or applying for any new credit accounts during or just before your mortgage application. Any changes to your finances could mean adjustments to your loan terms or qualifications which could mean extra time and money.
Ask for help if necessary
If you are establishing your finances or are working to rebuild your credit, consider asking a close family member with good credit to add you to their credit account. Ask to be added as an authorized user. As an authorized user, you are not responsible for repaying any debt but would reap the benefits of being added to an account with an established credit history which could drastically increase your score.
Buying a home is an investment, but by using these tips you set a solid foundation for your future.