How do you save money when buying a home? There are a few ways. You can use a discount realtor, save a bigger down payment and pay less in interest over the years, and boost your credit score to get better loan terms.
First-time home buyers often struggle with their credit scores. They are typically younger, therefore have less credit history and perhaps a few missed payments.
But a higher score means qualifying for a better rate which saves you a lot over the life of the mortgage.
If you're planning to buy a home soon, you need to check out these credit building tips for first-time home buyers.
1. Pay Down Your Credit Card Balances
Your credit utilization rate is how much of your approved credit that you're using. For example, if you have a $10,000 credit limit on a credit card and have used $5,000, your credit utilization rate is 50%.
Your credit utilization rate makes up about 30% of your overall credit score. The higher your rate, the more negatively it affects your score. Most experts recommend to keep it under 30%.
Also, keep in mind that more debt means more payments and less money available for a down payment, mortgage payments, and other household expenses.
2. Remove Late Payments and Collections From Your Report
At 35%, payment history has the largest impact on your credit score. Even one late payment can bring your score down.
It's worth noting that as a late payment ages (and you resume making on-time payments), its negative effect diminishes. After seven years, it drops off your report entirely.
But you don't have to wait seven years. There are a couple of ways you can get late payments removed sooner.
If the late payment is an error you can call the creditor directly and ask to have it removed.
As soon as you realize a payment is late, pay it and call your creditor. If they haven't reported it yet, they may not at your request.
If the creditor won't remove the payment, you can dispute it with the credit bureaus. The creditor has 30 days to verify the late payment. If they don't, the late payment is deleted. However, many lenders have departments that handle this, making it difficult to have late payments removed unless they were actual errors.
3. Become an Authorized User
An easy way to give your score a boost is to “borrow” someone else's. You can do this by becoming an authorized user on the account of someone with an excellent credit score. Now, that account shows up on your credit report.
Age of credit history makes up about 15% of your credit score. If you are just starting out, you can give yourself several years more of history by becoming an authorized user on an older account.
Be sure that the primary account holder always makes their payments on time. Missed payments will show up on your report. Also, be aware of the credit utilization rate on that account since a high rate can negatively affect your score.
4. Don't Apply for New Credit for 6 Months
Your credit score takes a hit when you apply for a new credit card or loan. It may only dip by a few points, but what if your score is right on the line? It could drop just below your lender's cutoff for a better rate.
Plus, your score factors in the average age of your accounts. A brand new account will drop your average, particularly if you only have a few accounts.
5. Get Free Credit Reports
Each of the three major credit reporting bureaus allows you to ask for a free credit report once a year. Take advantage and request your report well before you plan to buy a home.
This will show you where you can improve. You may find incorrect information that needs to be removed or you'll see how much your high credit utilization is affecting your score. With enough planning, you can make adjustments that will bring up your score in time to buy your first home.
If you order your report from each agency once, you can get a free report every four months. Take advantage so you can keep a close eye on what's happening with your score.
6. Take Advantage of Programs Like FHA
If your score still isn't amazing after following the first five tips, don't despair! You can take advantage of the government's FHA program.
If you have a score of at least 580, the FHA allows you to apply for a loan and put down a mere 3.5% down payment on the home. If your score is lower, you can still apply but you'll need to have 10% available for a down payment.
Even if you have no credit at all, some FHA lenders will work with you to establish payment history from alternate means. This can be rent payments, utility, phone bills, etc. If you have a positive history and haven't missed any payments in the last 12 months, you can use this to apply.
FHA rules allow for alternative history, but not all lenders will do it. Ask your real estate agent to recommend a lender who uses alternative history if your credit is bad or nonexistent.
Ready, Set, Buy!
Buying a home is an exciting time. Don't be discouraged if your credit score is not as high as you would like. There are many options for people who have poor credit.
Start using these credit-building tips for first-time home buyers today to set yourself up financially. Remember, a higher score will allow you to qualify for better terms on your loan, saving you money in the long term.