Buying your first home is such an exciting experience! So I was pleased to work with a client recently who wanted to buy her first home but she knew that there was some work to do before she could qualify for a mortgage.
She was working at a good job -- a job that she had held for the past for four years -- and she was earning a good income (thanks to the annual raises she received from positive yearly reviews). But she knew that not everything was perfect: She had slacked on paying some credit card payments on time, and she didn't have a clue about credit reporting. Even with great income and job stability, her ability to qualify for a mortgage was at risk.
We worked together and I helped her understand the importance of credit reporting and we cleaned up her credit that had some mistakes and then she focused on lowering her debt and paying all accounts on time. I'm happy to report that she just bought her first home!
If you are thinking about buying your first home, your credit rating will play a critical role in helping a mortgage lender determine whether or not to lend to you. Here are five credit tips you can use to help you stack the odds in your favor:
- Make a plan. When you first start talking about buying a home, get copies of your credit report from all three credit reporting agencies -- Experian, Equifax, and TransUnion. Use this as your personal "blueprint" to identify the ways you can improve your credit rating and increase the likelihood that you'll get a mortgage.
- Start with the obvious mistakes. These companies process a lot of data every single day. Even though they do a pretty good job, mistakes will be made and someone else's credit history could end up tacked on your report. Review your reports for errors. In particular, watch for previous addresses that aren't yours and credit cards that don't belong to you. Contact the companies immediately to correct the errors.
- Pay down your debt. Identify any credit cards that have an amount owing and pay them down as quickly as possible. Your credit reports consider how much available credit you are using, so a 5,000 credit limit with only 500.00 of available credit tells the bank that you're using most of what you have.
- Look at your "trouble spots" and commit to fixing them. For many people, a trouble spot is paying off their debts on time. For others, a trouble spot is having too much owing at once. For others, it's frequently applying for new credit (i.e. credit cards, loans, vehicle leases, etc... Anything that requires a credit check). Figure out where you tend to slip and make a plan to improve that aspect of your credit.
- Add time. Yes, you read that correctly: Figure out what you need to fix (from the above steps) and add time by doing it right for a while. Expect to spend a few months (or longer if you've struggled with your credit in the past) demonstrating your ability to maintain healthy credit.
These steps won't immediately result in perfect credit. It can take to time build up great credit scores. But they can improve your chances of going to a bank to get a mortgage... and getting a mortgage at a more attractive rate. As I like to say," Time heals all wounds, just like on the credit report."
And here's one other bonus, provided by Connecticut-based Mortgage Broker Denise Panza: "Instead of going to a bank for a mortgage, talk to your friendly neighborhood mortgage broker. Instead of putting all your eggs in one basket dealing with a bank, mortgage brokers can draw from a wider collection of lending institutions to help you find a great mortgage at a great rate to fit each individuals needs."
If you're an aspiring first-time homebuyer, start working on improving your credit rating right now so that when it's time for you to find a home, you'll have no trouble finding a mortgage.