At some point this summer or fall, all the pent up demand for housing that’s been building during the COVID-19 lockdowns is going to explode on the NoVA real estate market. If you thinking of buying a homethis fall, now is agreat time to make sure your credit is in shape and you are ready for the mortgage process. If you aren’t already working with a mortgage lender, it could be a great time for a consultation, as you can get some sound advice on how to fix specific issues in your credit report.
Credit is an important aspect of the home-buying process, because every mortgage lender is going to have some kind of minimum credit score in order to approve you for a loan. Depending on the typo of loan the minimum scores could vary widely. For instance, an FHA loan with a down payment of 3.5% requires a minimum credit score around 580. If you are able to afford a down payment of 10% or more, you may be able to get approval for a loan with a score as low as 500.
By contrast, most conventional loans follow the requirements of Fannie Mae and Freddie Mac, which typically require a score of 620 at minimum. If you don’t have a credit history, or if you have a few blemishes on your record, it’s possible you may not qualify for a mortgage. However, there are ways you can begin to raise those scores. Even if your have a score over 620, you may want consider taking some of these steps to raise your score even higher. The higher your score, the better the terms of your loan, which will save you money in interest over the term of the loan and lower your monthly payment.
1. Pay your existing creditors on time
This one may seem a bit obvious, but it is absolutely critical to improving your credit score. If you pay your bills, but have a habit of paying late, this could paint you as a credit risk to mortgage underwriters. If you pay a few days late, this won’t usually hurt your credit rating, but if you are more than 30 days late, your creditors will report you to the credit agencies. Each negative report on your credit report will lower your score. Making timely payments accounts for around 35% of your overall credit score.
2. Keep your credit balances low
It seems counter-intuitive, but zero balances on your credit lines do not really help your score. Mortgage lenders want to see that you are responsible with credit, and the only way you can do that is by making payments on an open credit line. Which means you need to carry a balance. Don’t let the balance get too high, though. Shoot for keeping your balances around 35% of the credit limit. Maxed out cards will make it look like you are struggling to make ends meet or living beyond your means. Keeping low balances on your open credit lines accounts for about 30% of your overall credit score. As you can see, timely payments and low balances account for the lion’s share of your overall credit score.
3. Avoid multiple credit inquiries
A good rule of thumb is too have at least three open credit accounts that you maintain in good standing. If you are just getting started with establishing your credit, avoid the temptation to open a bunch of credit lines. Each time you open a new credit line, there is an inquiry on your credit report that can negatively impact your score. Wait awhile before opening any new accounts, so that you don’t have a lot of inquiries at any one time. If you are constantly applying for store cards or other credit sources, you may give mortgage writers the impression you lack control of your spending.
4. Start rebuilding with a secured credit card
If you have found yourself in a situation where you have numerous negatives on your credit report, you can take steps to start rebuilding your credit. While the first step is to obviously get back on track with your existing existing credit is to pay off any outstanding debts that you owe or that is in collections. But then you need to establish a solid track record for paying on time and managing your credit wisely. A way you can do that is through a secured credit card. You may find it difficult to get a traditional credit card if your credit is bruised, so a secured card is the next best thing. Just as the name implies, a secured credit card is “secured” with a deposit. For instance, you may get a $500 limit for a $500 deposit. As long as you make payments on time, your positive history will be reported to the credit bureaus, and you can earn increases in your credit limit over time. Given time, maintaining a positive history with your secured card will help your credit score rise.
People who have been troubled with bruised credit often don’t know where to start rebuilding. It can be done! Follow these four steps, and you’ll be well on your way to your dream of owning your home.
Whether you are looking to buy or sell a home in Northern Virginia, we are always here to help with all your real estate needs! If you are unsure of your home’s value or if you are thinking about buying or selling, contact Jason at 703-298-7037 or Jason@JasonAndBonnie.com.