For aspiring first-home buyers, it’s not enough to have your savings schedule for a down payment under control. You also need to show prospective lenders a record of managing your money and repaying debts.
And that means your credit score is critical.
It will not only influence a lender when they consider your loan application, but affect the interest rate they’ll give you.
First-time buyers with poor credit scores can pay higher interest rates than those who have a strong history of money management.
Think of your credit score as your master key to the housing market. It opens the door to getting a mortgage and determines the interest rate you’ll pay. Ultimately, it affects the type of home you can afford.
For first-time buyers saving diligently, proactively fixing your credit now – while you’re in the saving phase – can be the difference between settling for a compromise property and buying your dream first home.
Even small improvements in your FICO or VantageScore can translate to huge savings and a wider selection of affordable homes.
Zillow research has found only 45% of Gen Z and Millennials are confident about their credit score.
It suggests that raising your score from Fair (580-669) to Good (670-739) can reduce your mortgage interest rate by more than half a percentage point. On a typical home, that reduction can save you over $1,400 a year in interest alone.
Waiting until you’re ready to apply for a loan is too late as any fixes take time to register with credit bureaus. Here are some tips for action:
Detective work – Obtain your free credit reports from all three major bureaus (Experian, Equifax and TransUnion) and check for errors. An incorrect late payment, a wrong balance or a loan you didn’t take out could be dragging down your score. Challenge any errors immediately. Be prepared for a six-week dispute process.
Main goal – Lenders look closely at your credit utilization ratio (the amount of credit you’re using compared to your total available credit). Aim to keep this ratio below 30%, but ideally under 10%.
Don’t be late – Your payment history is the most critical factor. Set up automatic payments for all debts, even small ones. One missed payment can severely damage your score.
Record keeper – The longer your credit history, the better. Resist the urge to close old, paid-off credit card accounts as this decreases your overall available credit. It can negatively impact your utilization ratio.