Congratulations on your decision to buy a new home! Before researching and investing resources, it’s wise to determine a budget for a new construction home. You’ll want to know your loan’s interest rate and your home’s budget.
Experian.com mentions that 90% of top lenders use FICO® scores.
FICO® scores can influence your approved amount, interest rate, and downpayment. You will enjoy more favorable loan terms if you have a good FICO® score and lower interest rates. According to Bankrate.com, a FICO® score above 740 offers better rates and downpayment options.
If you have a low credit score, you may want to wait to buy an affordable home; in as little as 6-months, you can see improvement if you work on your credit score. If you need much help, it can take up to two years. There are credit solution companies that can help you improve your FICO® score.
If you discover you need to work on your FICO® score, there are realistic, actionable steps you can take to improve your score. If you dream of owning a home, you can achieve it regardless of your current FICO® score.
How Can you Get Your Credit Score?
Through annualcreditreport.com or by mailing a request to each of the three major credit bureaus (Equifax, TransUnion, and Experian), every United States consumer gets one free copy of their credit report.
For those who have never used mail, there are numerous online ways to view, monitor, or work on your FICO® score.
For many Americans, a FICO® score is easy to obtain. Consumers have the mail options mentioned above and all of the options below. The below options are quick and mainly free.
According to Credit Karma, consumers have at least six free options. Capital One cardholders have free access to Creditwise, a FICO® software tool with valuable information, tools, and historical data. It looks like Chase Credit Journey offers free FICO® monitoring services, too.
Ways Most Americans View And Improve Their Credit Score.
- Financial institutions usually provide consumer tools or access to resources with consumer tools. Many financial institutions now offer a free credit score as a part of their services, and some even include it on statements. Many of these institutions provide detailed information for consumers.
- Consumers pay for financial SaaS services. FICO® data is either an add-on or the main feature. Still, most of the details consumers need and want are immediately available within their accounts on places like Equifax, TransUnion, or Experian. Numerous third-party websites offer FICO® software monitoring services.
- They hire a company or credit repair expert to help them fix their credit history and improve their score. As with any credit-related service, be wary of these companies. Don’t work with them if you don’t know what they’re doing for you and why.
- Consumers fix their credit DIY style. They research, discover options, and work with credit bureaus and creditors to fix their credit history and improve their FICO® /credit score.
Understanding Credit Scores
Improving your credit score means taking the time to understand how credit scores are determined. Understanding credit scores will make it possible for you to improve them. Plus, you can focus on areas you know you can improve.
Each of the three major credit bureaus has a unique credit score for you. Although they may differ, they all come up with a number based on similar data points. The FICO® score is the most well-known and widely used credit scoring system. Most lenders use your FICO® score; they all look at one of your scores. Below is each bureau, along with a piece of information about each:
What Are The (3) Three Credit Bureaus
- TransUnion: Database of over 1 billion consumers in 30 countries.
- Experian: Experian uses the FICO® Score 8
- Equifax: Offers Identity Theft and Fraud Protection Services
Suppose you are looking to improve your credit to buy a house being built by a home builder or because you found move-in-ready homes you love. In that case, you should be aware of your credit scores and the factors that impact them.
Credit Score Elements
FICO® is the most used software for mortgage lending. FICO® stands for “Fair Isaac Corporation;” the acronym is now the company’s official name. In order of weighted importance, the five components of a FICO® credit score are Payment History, Credit Utilization, Length of Credit History, New Credit, and Credit Mix. *The Below information is not financial advice. It’s information and tips that should be individually considered and researched.
- Payment History – The more on-time payments your credit report shows, the higher your score. Payment history accounts for 35% of your FICO® score.
- Even if you can only make the minimum payment by the due date each month, at least you are paying on time. If you can’t meet the minimum monthly payment, call your lender or credit card issuer, and explain to them honestly your financial situation. Most of them have a relief program where your interest and payments can be temporarily or even permanently lowered. If fees and interest costs make up most of the balance, inquire about the company eliminating some of them for you.
- Credit Utilization – Credit Utilization considers revolving credit, like credit cards, store cards, and lines of credit. Amount owed or Credit Utilization accounts for 30% of your FICO® credit score. Also commonly known as the amount owed vs. credit extended.
- The more revolving credit you have that you are using, when compared to how much credit has been extended to you, the lower your score. Keep your utilization under 30% for favorable lending outcomes. If you are extended a credit line of $300 on your first secured credit card, you should never owe more than $90 on that card. If you’ve got a line of credit of $1,000 with a different lender, never use more than $300 of that credit extended to you.
- Length of Credit History – This is the average age of all your credit accounts, whether revolving lines of credit, installment loans, or mortgage loans. Length of credit history accounts for 15% of your FICO® score.
- Lenders prefer older credit lines. Accounts that have been open longer are your best accounts. Don’t close old credit accounts to keep this part of your score healthy, even if your credit report shows late payments. Continue to use these accounts minimally to keep them open (unused credit can go away) and pay on time every month. Utilizing credit early in life is a good thing when handled responsibly!
- New Credit – Lenders will look at how much credit you’ve acquired recently. New Credit and their accompanying hard inquiries make up 10% of your FICO® score.
- Ensure you’re only opening new accounts when necessary. Opening new accounts temporarily lowers your credit score, usually for a few months, until you’ve established positive payment history. Hard inquiries made against your credit report to obtain this new credit will also lower your score by a few points (generally less than 5 points). They will affect your credit score for one year while they remain on your credit reports for two years.
- Credit Mix – The various type of credit you have makes up the remaining 10% of your score. Your debt diversification is another way to say it.
- Establish a healthy mix of credit types. Lenders typically want to see how you manage various credit situations to get a complete picture of how you might handle their extension of Credit. These can include revolving credit, such as credit cards, installment loans, car loans, or service credit, like cell phone bills.
Also, Check – How Can I Sell My Home Fast?
Poor Credit & No Credit History
If you have no credit or poor credit, welcome to the club! Significantly few adults go through their entire life with excellent credit.
Poor credit today means you’re just beginning your journey. Now that you know what elements affect your credit score, you can work on establishing a new history of on-time payments and accountability. Over time, your efforts will improve your credit scores.
These tips can help improve poor credit scores. These tips will help if you have no credit score, especially any recommendations mentioning obtaining credit. A co-signer or secured credit card may be the only option at first.
There are numerous ways to improve your credit if needed. These tips are just the beginning and most common.
If, after reading these tips and viewing your credit score, you feel overwhelmed and don’t believe you can tackle repairing your credit, continue doing research. Surprisingly, many reports have inaccurate information that should be removed from your history. Doing the research and knowing will pay off.
Some credit repair services may be the best route but be wary and ask for reviews. The industry is famous for shady characters and loosely regulated services. Always be safe.
- Review your entire credit report for accuracy. Look for bad and good things that are or aren’t in the information.
- Suppose you wish to dispute anything on your credit report. In that case, you may contact the credit bureau in writing, after which they have 30 days to respond. If you do not receive a response within that 30-day time frame, the credit bureau is required to drop the item in dispute from your credit report. Suppose you disagree with the credit bureau’s decision regarding the disputed item. In that case, you are always free to add a statement to your credit report.
- Obtain a pre-paid credit card, called a secured credit card, that reports your payment information to the credit bureaus.
- Your credit limit will be the same as your pre-paid deposit, usually $200 – $500. These cards almost always carry a yearly fee, ranging from $35 to $125.
- Take out a loan against a Certificate of Deposit (CD). First, open a second chance checking account at a bank that offers these types of accounts. You are more likely to be approved if you agree to direct deposit of some sort. Then, purchase a minimal 6-month or 12-month CD from the bank using funds from your checking account. After a couple of months of having the CD, apply for a small loan from the same bank, using the CD and checking account as collateral. The loan repayment will report to the credit bureaus.
- Get a credit card from a store like Kohls, Walmart, Target, or Best Buy. Gas Cards from Chevron, Shell, Circle K and Quick Trip can also offer a way to obtain and use more credit.
- When you become an Authorized User of someone else’s credit card account, their credit history with that account carries over to your credit history. If you want to improve your credit, be sure they manage their credit responsibly. Ensure you are only signing on with someone you know and trust.
- Starting your credit journey with a co-signer is usually a great approach if you know someone willing and able to take the risk for you. By having a co-signer for a loan or credit card application, you are both responsible for the debt. If you can’t or won’t pay the debt, the co-signer’s credit is affected, so the lender assumes that the co-signer will make the payments if you don’t.
Wrapping up Credit Score Tips for Your Home Purchase
As you can see, a lot goes into your FICO® score. When looking for a new home, your FICO® score can dramatically affect your approval, interest rate, and down payment.
If you’re like most Americans, your budget is less about the home’s cost and more about the monthly mortgage payment. With a high credit score, you will get more favorable interest rates, plus you could end up with a lower down payment. To understand how important interest rates are, let’s look at the monthly payment difference for a highly affordable home. We will price this new construction home at $300,000.
The below payments do not include taxes and other fees.
- 30-year fixed home mortgage for $300,000, 4.42% = $1,506
- 30-year fixed home mortgage for $300,000, 6.42% = $1,880
- 30-year fixed home mortgage for $300,000, 7.42% = $2,081
Three percentage points. If you can get a loan with an interest rate of 3% less, you can save nearly $500/month. Start planning, work, and get the best rate possible by being able to lock in your financing at any time. Interest rates may not decrease significantly; they may increase in the long term. They’re something to pay attention to, and there’s nothing you can do about them unless you can plan for a home and have the ability to finance when you want.
Homebuyers looking to purchase their new home on their timeline should find home builders with move-in-ready homes. The homes are always available. When you are ready to buy and finance your home, you just visit the community.
If you are planning to move, try to have things ready to get the best financing.
To improve your credit score or FICO® score quickly:
- Get a secured credit card immediately.
- Focus on one of the components that affect your score the most.
- Do the most you can with the information and tools you have. Research to find ways to improve your specific score.
- If you have the time and capacity, work on more than one credit score component.
- Make all of your payments on time.
- Pay more than your minimum monthly payment if possible.
- You can ask the lender with the history on your credit for a larger limit if you have a low debt-to-income ratio.
When you are getting ready to buy a new home it is okay to use your credit. Use as little of it as possible, keeping old accounts open and applying for new credit only if necessary or if it was recommended by a professional. Good luck with the purchase of your new home.