When it comes to buying a home, few things are more important than your credit. The better it is, the more buying power you have. In this article the first is a series of posts entitled “Credit Healthy,” agent Joyce Marie Jackson breaks down your credit score and takes a look at what it takes to build your credit health from the bottom up. Whether you’re a first time homebuyer or this is one of many purchases you’ve made in your lifetime, it pays to understand what goes into your credit score so you can be prepared when it comes time to buy. Enough from us…we’ll let Joyce take it from here…
Too often a buyer is so excited about buying a home, the basics are forgotten.
You’ve saved some money, that’s good, and maybe paid down some of you debt. Your lease is coming to an end soon, so I guess it’s time to shop for a home. Is that it or are there other steps?
Here’s an option:
- Contact your financial institution and inquire if they offer a credit score and/or monitoring plan for free or for a small fee. You may ask yourself, “Why do I need to do this?”
The reason is because before you can start a plan, you must know where you stand. Knowing what’s in your credit report is the first step in identifying the health of your credit worthiness.
Your credit worthiness is what a lender will use to approve or disapprove you for a mortgage loan. It’s all in the report, but it’s up to you to make sure it’s accurate.
- Know how your FICO score is determined.
- 35% – Payment History – Always make your payments on time.
- 30% – Amounts Owed – Knowing your credit limit is key. The amount you owe and the amount your have available will determine your utilization ratio and debt ratio.
- 15% – Length of Credit History – The age of an account is important. The longer you have a particular credit card, the better. If you decide to pay it off, that’s great! Just don’t close it out. Closing out a credit card that you’ve had for a long time can lower your credit score.
- 10% – Type of Credit Used – Similar to building your retirement portfolio, your credit should also contain a mixture of different types of credit, such as credit cards which are usually revolving credit, fixed loans, and other mixtures of credit.
- 10% – New Credit – New credit and the available amount. Don’t max it out.
- So, 35+30+15+10+10 = 100% of your FICO score.
You’ve identified what’s in your credit report and taken steps to make the report accurate. You know what makes up a credit score and what parts you may need to work on in order to increase it. Saving is also key and must be part of the budget. In addition to having a great credit score and low to no debt, there is still a need to have available funds for various buyer expense such as inspections, appraisal, earnest money, option money, closing costs, and down payment. Sounds scary and it can be, but if you are prepared it will be less stressful. Does this mean buyers have to have perfect credit and be debt free before they should purchase a home? No, it just means that the more you know and the better prepared you are, the better your home buying experience will be. So, “Build It Right from Ground Zero.”
image courtesy of zeevveez