Each potential
home buyer dreams of the day they'll finally get the symbol of independence,
security and prosperity: the key to the front door of their new home. Before
you get that one, though, there's another key you need to craft. Your credit
score, a numerical representation of your credit history as an indicator of
your ability to pay your bills, will determine a lot about your housing
situation, from how much house you can afford to the interest rates you'll
receive.
Your credit score is determined by three different credit
monitoring agencies: TransUnion, Equifax and Experian. Each has its own method
for determining which events are most important to your score, so your number
may vary depending upon the agency. Paying debts off, making payments on time
and using only a small percentage of your available credit make your score go
up. Missing payments, opening many credit accounts or carrying a significant
balance of debt from month-to-month will decrease your score.
Less important than the actual score is your score grouping.
Lenders tend to lump borrowers into four categories: sub-prime, near-prime,
prime and super-prime. Different lenders break these categories down at
different score points, but the terminology and treatment are fairly universal.
Super-prime lenders get the lowest rates, because they represent the lowest
level of risk for the lender. Sub-prime and near-prime borrowers will have a
lower cap for the size of the loan they can take and will generally pay a
higher interest rate. If you're working on raising a low credit score, a good
target number is 640. This will generally put you in the prime group and ensure
you don't have to pay extra on your mortgage because of credit. If you're
building good credit, 740 is generally the lowest super-prime score, which will
give you access to some of the best rates and terms available.
If you're going house-hunting in the next year, there are three
steps you can take right now to improve the terms of your mortgage. Check your
credit score, take steps to raise it and manage your loan in other ways. Taking
these three steps will put you on the fast track to affordable home ownership!
Check your credit score
You can check your credit report for free once a year at
annualcreditreport.com. Note, though, that there may be a nominal fee to
receive your actual score along with the report. There are many similar
websites, but many of them will charge you. Annualcreditreport.com is the site
created by the three credit companies to provide consumers with transparent
access to their financial information.
If your score isn't at the level you think it should be, there may
be errors or inaccuracies that are dragging down your good name. Look for
accounts you don't recognize or balances that are not up-to-date. You may even
catch an identity thief red-handed! The report comes with instructions for
challenging any item. In most cases, you can leave a note for lenders in the
file explaining the item under dispute.
Boost your credit score!
There are no simple tricks to bump your credit score in advance of
a mortgage. You need to develop a 6- to 12-month plan to boost your credit
score before getting your mortgage by making sound financial decisions.
Demonstrate to lenders that you can use credit responsibly, and your score will
increase.
One of the biggest drags on a credit score is percentage of
utilized debt. If you're carrying a balance on credit cards, this tells lenders
that you may be using credit to pay for your day-to-day expenses, and that
lending you more money would not be a smart move for them. Getting balances to
zero should be goal number one!
Also, take care that you don't make any major purchases using
credit right before you attempt to qualify for a mortgage. Even if you're
expecting a major windfall, such as an overtime check or a tax refund,
creditors don't see that on your report. Hold off until you have the cash in
hand before you splurge on a new TV or car!
If it's a lack of credit history that's hurting your score, many
lenders offer "credit builder" loans. These involve borrowing a small
amount of money and making regular installment payments on it. Parents can
frequently take out these loans on behalf of children to help them build a
stronger credit history.
What else?
If your credit score is low, and there's nothing you can do about
it, you may need to take other steps to get a better position on a loan. You
might try boosting your down payment or shopping for less expensive houses, so
you're borrowing a smaller sum of money. A co-signer, another responsible party
willing to take on the risk of the loan, can also improve your terms. If your
debt is a serious problem, perhaps moving into a new house isn't a good
short-term priority. Focus instead on paying off debt and saving up for a down
payment. This can keep you from getting stuck with a house payment you can't
afford before you're ready for it.
SOURCES:
http://hubpages.com/money/Tips-To-Increase-Your-Credit-Score
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