Whether you are planning to buy a home in 2018, or are considering refinancing your mortgage, you’ll want to make sure your credit is in tip top shape to get the best interest rate possible. Here are 8 ways to boost your credit score in the New Year to help you reach your financial goals:
- Pay your installment loans like car loans and student loans on time every month. Even paying them a day late can wreak havoc on your credit. Pay on time, every time. If you have to be late, call your lender before the payment is due to explain and to see if there are any options to pay later that won’t affect your credit.
- Do not close old credit cards. You haven’t used that department store credit card in awhile, but you have a $1,000 credit limit. Closing that card will actually reduce the amount of total credit you have available which can count against you. Keep it open. Just don’t use it, particularly if it carries a high interest rate.
- If you don’t have credit, establish it. Not having credit is a problem because you haven’t shown a lender, credit card company or other creditor how you’d handle credit. Apply for a small department store card, a secured credit card, a secured loan or a combination of these accounts to begin establishing credit. Start by charging a small amount and paying it off at the end of each month. Credit history will be based on how timely you pay but also how long you’ve had credit, so this strategy will take time but it is worth it.
- It’s OK to pay off loans early. Paying your loans on time is critical, but if you are in a position to make payments early, to add extra money to the principal portion of the payment or pay it off early, you will help your credit.
- Review your credit score for free annually. Correct any obvious errors and follow up on items that may not be your, the sooner, the better.
- Pay off collection accounts as soon as possible. Have an old dentist bill from three years ago you didn’t pay? This can stay on your credit report for up to seven years, even longer if the original creditor “sells” the debt to another credit agency for collection.
- Don’t open a bunch of new accounts at once to increase your amount of available credit. This can lower your average account age. Instead, open accounts as you need them and use them responsibly.
- Keep your credit balances low on revolving accounts. Having a lot of debt negatively impacts your credit.
Good credit is important in qualifying for a mortgage, but potential homebuyers with less-than-perfect credit can still get a mortgage. No matter what your score, these seven financial habits will make buying a home much easier:
- Paying your bills on time or early. This means paying all of your bills on time, not just the ones on your credit report. In addition to credit cards and loan payments, this means utility bills, rent and other regular payments that show you are a responsible adult. Ideally, pay your bills early. This is much easier now that we can access our credit card and loan accounts online.
- Pay more than the minimum balance due. If your minimum payment on your Target card is $50 a month, pay $75 or $100. This will reduce your total debt faster as well as the amount of total interest you are paying.
- Use less than 30 percent of your available credit. While it is helpful to have credit cards for emergencies, you want to keep your total balances under 30 percent of your total credit limit. For example, let’s say you have a Visa card with a $1,000 credit card limit. Don’t charge more than $300 on that card.
- Review your credit report for errors. This is a good habit to get into no matter how good your credit is. If you check your credit report annually, you’ll be able to identify mistakes and get them corrected before it is time to apply for a mortgage loan. See a mistake? Contact the original creditor right away and contact the credit bureau to dispute the information. It could take several months to clear a mistake, so staying on top of your credit report is helpful.
- Start building a credit history early. If you are in your early 20s, you ideally have established some credit already, whether it is an introductory credit card or a student loan. Start small by applying for a low limit credit card or getting a car loan with a parent as a co-signer.
- Keep paid off accounts open. The length of your credit history is important to a mortgage lender. Even if you don’t use that Visa card you got in 2010, and the balance is zero, keep the account open. It shows a seven-year credit history, and it will help lower your total debt-to-credt ratio (see #3 above).
- Set a budget and stick to it. With credit cards so readily accessible, it is easy to treat yourself with a nice dinner, a manicure/pedicure or furnishings for your man cave. But is this the best use of your money? Probably not – unless you budget for it. Set a monthly budget and only indulge in those little luxuries when you have the money to do so without charging it to a credit card.
These good money habits will help you position yourself to qualify for a mortgage loan when you are ready to buy your first – or next – home!
Is buying a home in 2017 one of your New Year’s resolutions? If so, then you’ve come to the right place. Here I will tell you the top 3 things you must do this year to make your dream a reality, adapted from Realtor.com.
- Automate your savings. Whether you plan to put 3 percent or 20 percent down, saving for a down payment requires discipline. I recommend that you automatically set aside savings, whether it is an automatic transfer from your checking to your savings each month or a payroll deduction that goes directly into your savings account. However you do it, make saving money automatic. If you don’t see the money, you won’t spend it, right?
- Establish credit and maintain a solid credit history. It can take time to build up credit, but if you do it right, it doesn’t have to be difficult. Start with a low interest rate credit card, or a department store card like Macy’s or Target. If you’re paying on a student loan, be sure that’s being reported in your name. Installment loans like car loans are also helpful in establishing credit. Now that you’ve got credit, keep it clean by paying on time every month and by not exceeding more than 30 percent of your total credit limit on each of your accounts. For example, if your Macy’s card has a $1,000 credit limit, don’t spend more than 30 percent of that limit. Make sure you check your credit periodically (once a year) to be sure there aren’t any discrepancies.
- Stick to a budget. Owning a home is a big investment, and along with it, come big bills – utilities, homeowner’s insurance, mortgage payments, property taxes and more. To get used to those higher bills, learn to develop and stick to a budget. This will make it easier to discipline yourself once you move into your dream house to be sure you can afford it.
As with any new habit, these behaviors will take time to become ingrained in you, but just think at the reward once you’ve mastered them – your very own home! Well worth the hard work.
A good credit history is needed to buy a home, but what constitutes a “good” credit score varies by lender and loan type. For example, to qualify for an FHA loan with a 3.5% down payment, you need a FICO score of 580 or higher. Conventional loans backed by Freddie Mae or Freddie Mac require a minimum credit score of 620.
With that in mind, it is important to monitor your credit score at least annually. If you have seen your score drop since you last ran your credit report, here are some possible reasons for the change:
- Using too much of your available credit. You shouldn’t use more than one-third of your available credit. This can also become a problem if any of your creditors reduce your credit line, throwing the total balance versus total available credit ratio out of balance.
- Missing payments
- Accounts in collection, tax liens and bankruptcies will all lower your credit score.
- Average length of time with open credit lines. The longer, the better.
- Limited types of credit – a mix of different credit types is better than just credit card accounts, for example.
- Too many credit inquiries for credit cards and loans
- Inaccurate information on your credit report
Correcting these problems can take time and a concerted effort on your part to reverse the trend and boost your credit score, but it is possible. Talk to your mortgage lender for advice on what your credit score is, what it needs to be and how to improve it if you are falling short.
As we said in our Oct. 17 blog post, this is a seller’s market, so it is important that you get pre-qualified or pre-approved for a mortgage. Here’s what you’ll need to qualify in the current real estate market:
- A down payment. This can range from 5% to 20% of the purchase price. According to Freddie Mac, 40% of buyers are putting down less than 10% with some as low as 3%.
- Income verification, credit history and asset documentation
- Third-party appraisal
- Stable income
- Good credit history
Freddie Mac recommends these 5 next steps.
Have questions? Not sure what’s next? Team Marti can help. Contact us today to set up a no-obligation appointment!
Right now we are in a seller’s real estate market, because the number of homebuyers exceeds the number of homes for sale. This means that, to buy your dream home, you need to stand apart from other home buyers. Not only do you need to have professional representation from an experienced Realtor to make a solid offer, but you also need to get mortgage approval to ensure a smooth home purchase.
We recommend starting with pre-qualification or pre-approval from a qualified mortgage lender or broker. The pre-approval process will tell you how much you can afford to spend on a home. Freddie Mac recommends that you focus on the 4 Cs which determine the amount you will be qualified to borrow:
Capacity: Your current and future ability to make mortgage payments
Capital or Cash Reserves: The money, savings and investments you have that can be liquidated
Collateral: The home that you want to purchase
Credit: Your history of paying bills and other debts on time
Before you start shopping for a new home, get mortgage lender and broker recommendations from your local Realtor. Work with that lender or broker to find out what your credit score is, how much down payment you’ll need and how much you can afford to borrow. Then you can begin your search with the confidence that you’ll qualify to buy the home of your dreams. Happy House Hunting!
[To learn the difference between pre-qualification and pre-approval, see my June 6, 2016 blog post.]
There are all kinds of terms thrown around when it comes to buying a home. Two of these terms are “pre-qualified” and “pre-approved.” While these terms are similar, they are, in fact, very different. Let’s talk about the differences.
Being pre-qualified for a mortgage does not guarantee that you will get a mortgage. A lender will talk to you while you’re still a prospective buyer and ask you questions about your credit, assets and income. During this meeting, you will not be required to show proof of income, and a credit check will not be run. There’s no harm in being pre-qualified, but focusing on pre-approval should be your priority.
Pre-approval from a lender means your credit check has been approved, and that your income and assets have been verified by the lender. The mortgage lender has made a decision to lend you money to buy a home.
There is a time frame to use your pre-approval for the purchase of a home, generally 120 days, according to Realtor.com. For pre-approval, you will need at least two years of tax documents, several weeks of paystubs, your two most recent tax returns, and any other proof of your income. A credit score of 740 or higher will help you get the lowest interest rates and a minimum credit score of 620 to be approved for an FHA loan.
In short, pre-qualification means a lender will have an overview of your financial history, without pulling a credit report or verifying your income. Pre-qualification will not help much when it comes to buying a home, but it will help you learn where you stand and if there are areas you need to work on. Pre-approval, on the other hand, is vital to getting a mortgage.
For more information, please contact your mortgage lender or an experienced Realtor®. Good luck!
With so many people on your gift list, it’s easy to get carried away with holiday shopping. However, overspending can negatively impact your credit score, which can affect your home buying ability, if you’re not careful. Here are some tips to keep your budget and credit score on track this holiday season:
- Set a budget. Before you hit the mall – or your favorite online stores – decide what your budget is for each person on your list. Choose gifts within that price limit before you ever go shopping, and commit to staying within that pre-set limit. Being sensible now will give you more financial power later.
- Pay with cash instead of credit or debit cards. It is easy to overspend using credit or debit cards because you aren’t seeing the money that goes in and out of your accounts. It is also easy to exceed your budget this way, promising yourself you will pay off the bills after the New Year. You don’t want to use more than 30% of your total credit limit, so maxing out your cards is a bad idea. Paying with cash will help you stay within your budget.
- Skip the gift exchange this year. Most of us find our budgets stretched to the limit during the holidays. Talk to friends and family with whom you normally exchange gifts and agree to skip the gifts this year or maybe just buy gifts for the kids. Instead, you can do a white elephant exchange, make homemade treats for each other, or exchange services like babysitting or cooking lessons. You’ll be surprised how many people will be grateful for the suggestion, and it’s fun to see how creative people can be.
- Be vigilant about identity theft and credit card fraud. If you’re doing online shopping, make sure you are on a secure site and a secure WiFi network, like your home network. Never make online purchases or access your credit or bank accounts online using public WiFi, and check your bank and credit card statements every few days so you can catch any unauthorized purchases immediately. If you suspect identity theft or credit card fraud, contact your card issuer and bank right away. It is a good idea to let the credit bureaus know too.
- Shop online cautiously. If shopping online, pay with PayPal to make sure your information is secure, and not shared with the seller. Does a price seem too good to be true? It just might be. Don’t go just by a site’s product photos. Look at the product details and dimensions, and look at customer reviews. If something seems a bit off, it just might be. Shop elsewhere.
- Don’t spend your whole holiday bonus on gifts. If you are lucky enough to get a Christmas or year-end bonus, don’t spend the whole thing on gifts. Buy you or your family a fun treat or reward, and save the rest for a down payment on your next house, the kitchen remodel you’ve always wanted, or to give yourself a financial cushion for emergencies.
- Don’t load up a low-limit card. The closer your balance is to the limit, the lower your credit score will be. You’re better off getting a higher limit card and spending less on that to pay it off. Remember, the benchmark is spending no more than 30% of your total credit limit on all cards and credit lines.
- Avoid opening a ton of store loyalty credit cards. We’re talking about cards like the Target Red Card or Alaska Airlines’ credit card. Every time you apply for credit, your score will get dinged a little. The more often you apply for these cards, the more your credit score will go down. The savings in store or the cash back rewards may seem worth it, but lowering your credit score isn’t.
- Don’t close your credit card accounts. It may be tempting, because you think you’ll save money in the long run, but you won’t. This will take credit away from the calculation used when seeing how much credit you utilize. If you need to limit your spending, put your credit card in a safety deposit box or a safe at home. That way it is available for emergencies, but it isn’t in your wallet for easy spending.
It is easy to get caught up in the spirit of the season and to spoil your loved ones with gifts. You can still spoil them, but do so in a way that fits within your budget. This will allow you to enjoy the holidays while also achieving your long-term financial goals – like buying a house. Happy Holidays!
Whether it is your first home or your third one, you don’t want to make costly mistakes when buying a home. Here are six mistakes that you can avoid with a little time, effort and knowledge:
- Not checking your credit score. If you don’t know to expect with your credit history, it’s likely that buyers and lenders may not take you seriously. Looking at listings and pre-planning is fine, but you need your credit score to provide accurate information about your credit history. Review your score a few months before you’re ready to start shopping for a home. This gives you time to ensure everything is accurate and to dispute mistakes. As an added bonus, if you have a high credit score, the pre-approval process will be easier, and you’re likely to get a lower interest rate.
- Forgetting about hidden costs. Sure, you’ve budgeted for your mortgage payments and your monthly bills (e.g., utilities, insurance, etc.), but don’t forget about property taxes, homeowner’s association fees, closing and moving costs. These could set you further back if you’re not prepared. You can learn more about closing costs here.
- Creating a long-term budget. Budgeting is critical when buying a house. You should think about what you can afford on a monthly basis for the length of the mortgage with a focus on the here and now. No more than a third of your monthly income should go toward housing expenses. If the house you’re considering will cause you to go over that, work with your Realtor to find something that’s closer to your price range. Bottom line: If you can’t afford it now, it won’t matter if you will be able to afford it five to 10 years from now.
- Not working with trained professionals. Some people choose their real estate agent blindly, and that works to their disadvantage. Ask for referrals, do some research, and make an appointment to interview a couple of Realtors. Look for someone who has your best interests in mind, and is willing to work with you and your budget to find a home perfect for you. Ideally, choose someone who has been in the real estate business for a while, is familiar with the community where you wish to live, and listens to your wants and needs.
- Falling in love with a home before someone inspects it. You may have found your dream home, but sometimes even dream homes have hidden flaws. Before you get your heart set on a home, have someone thoroughly inspect it. This could possibly save you additional time and money, and you’ll know if a house is going to be more work than it’s worth. Find an inspector that is independent from the real estate broker you choose to avoid a conflict of interest.
- Failing to research. You may love a home but not the neighborhood. Research the area to make sure it will be a good fit for you. If you want to live in an area with good schools, research before you look at homes. Look into the resale value of your home. If you decide to sell it later on, will you be losing money should you try to sell it?
Talk to all your Realtor about all of these potential pitfalls, and she’ll be able to help you avoid them.
Last month we talked about how a low credit score can affect your ability to qualify for a home loan and purchase your next home. Today we’re going to talk about how to improve your credit score with these 6 tips!
- Stay on top of payments. While this seems obvious, it’s critical to raising your credit score. If you don’t pay on time, it can reflect poorly on any future lines of credit, including mortgage or home equity loans.
- Erase any dings on your record. Dispute any entries that were a result of identity theft, and correct any errors in your credit history by going directly to the reporting institution.
- Pay off outstanding debt. Focus on making minimizing debt to raise your credit score. When you lower your total balance owed, you also lower the amount of interest you pay, and that will in turn, work toward improving your credit score. Stay on top of debt, and you’ll stay on top of your credit score.
- Charge less. If you’re charging less, you’ll have lower statement balances. Credit bureaus look at statement balances, instead of carrying a balance when they calculate your credit score.
- Don’t become a victim of identity theft. Make sure you carefully check your statements each month to look for errors, and alert your card issuer if you see any problems. Avoid sharing personal details, and use hard-to-guess passwords.
- Be patient. If you have big red flags in your credit history (filing for bankruptcy, for example), it will take some time for your score to bounce back. In most cases, it can take from 7 to 10 years to erase the negative effects on your credit score.
Have questions? Need a referral to an experienced mortgage lender? Your local Realtor® can answer questions and provide referrals. Good luck!