Deciding to purchase a home is a big step in life. For many people, the shift toward homeownership signals a sense of growth and stability. It’s an investment that will pay dividends years down the road. Purchasing a home also has a profound emotional impact.
However, before you can start looking for your dream home, the first step is checking your credit. Here’s what you need to know about how your credit score impacts your homeownership goals and what to look for on your report.
Your credit score is a culmination of your debt history. Lenders use this summary to determine your eligibility for a home loan and to determine which options are available to you. Generally speaking, the better your credit score, the better your likelihood of securing a home loan. Additionally, having a great credit score can save you thousands by improving your eligibility for lower interest rates.
Your credit score showcases how well you’ve handled your money thus far and whether your habits are a risk for the lender. As such, it’s important to look at your credit report the moment you start thinking about purchasing a home, as it can take time to improve your credit score.
There are a variety of positive and negative factors that impact your overall credit score. Things like making minimum payments on time and being approved for more debt than you utilize contribute to a positive score. Conversely, negative items like late payments and collections are damaging to your credit score.
It’s important to note that there’s a statute of limitations on your credit report, after which certain items have to be removed. Hard inquiries (applications for more credit) are meant to be removed after two years. Collections and missed payments are supposed to be removed after seven to ten years, depending on your location.
If you notice items on your credit report that don’t belong, you can file a dispute to have them removed.
When reviewing your credit report, the most important thing to be aware of is the accuracy of the information. If there’s anything on your report that seems unfamiliar, it’s important to follow up on it at once. The item could be something that slipped your mind or a credit check through a third party. For example, if you purchased a financed vehicle, the car dealer may have used a third party creditor. Rather than the dealership name, it might be the name of that creditor that shows up on the report.
Look for inaccurate information or items that should have been removed. These items could be a sign of fraudulent activity or mishandling of your accounts. In other words, you could be paying for someone else’s mistakes.
It’s also important to take note of the mistakes you’ve made in the past and put a plan in place to avoid them in the future. Proving that you’re financially responsible is a must when purchasing a home.
While you work to remove any flagged items that shouldn’t be on your report, there are also things you can do every day to improve your credit score. Ensure you’re making the bare minimum payments and that they’re getting in on time, and work to pay down your existing debts to improve your debt ratio.
If you haven’t used credit before, it’s time to start. Get a low limit credit card or a bill in your name to start building a credit history. When lenders look at your finances, having no credit history can be just as damaging as having a poor credit history.
Give yourself plenty of time to review your credit score and make positive changes before you purchase a home.