If you are in the market for a new house, you may be overlooking one key to your success: your credit score.
That three-digit number has a direct impact on your ability to get a mortgage and what interest rate you will pay.
Mortgage rates are at two-month lows, with the benchmark 30-year fixed loan at 3.11%, according to Bankrate. On Wednesday, the Federal Reserve announced it will continue to keep short-term interest rates near zero, which means mortgage rates should stay low.
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To get that low rate though, you’ll have to have a good credit score.
“Even a quarter point or half point can make a really big difference over the long haul on a large loan amount,” said Ted Rossman, senior industry analyst at Bankrate and CreditCards.com.
Credit scores range between 300 and 850. A good score is between 670 and 739, very good is from 740 to 799, and 800 and up is considered excellent, according to FICO, a leading credit-scoring company.
Home buyers who took out mortgages in the fourth quarter of 2020 had a median score of 786, according to the Federal Reserve Bank of New York.
If you don’t measure up, it doesn’t necessarily mean you are shut out of the market. There are several moves you can make to improve your score.
First, check your credit history
You are allowed one free credit report a year from the three main credit-scoring companies: Experian, Equifax and TransUnion. You can reach out to each directly or you can access them through annualcreditreport.com.
Not only should you know your score, you should also make sure there are no mistakes or unintended skeletons in your closet, like a missed payment you forgot about.
Pulling your report before you apply for a mortgage or pre-approval, ideally a few months in advance, will give you time to correct any issues.
Pay bills on time
Late or missed payments can knock down your score.
The easiest way to avoid that is to set up automated payments for your bills, said Faron Daugs, founder and CEO of Harrison Wallace Financial Group.
Lower your credit utilization ratio
Lenders will look at whether you have high balances on credit cards.
Even if you pay your credit card bills in full each month, you may still have a high utilization rate, Rossman pointed out.
For example, if you make $3,000 in purchases and have a $5,000 limit, you are using 60% of your available credit. Try to keep it below 30%, Rossman said. Those with the best credit scores keep it below 10%.
Making an extra payment in the middle of the billing cycle can help knock the balance down before the statement comes out.
Become an authorized user on someone’s credit card
If you have no credit, one of the best ways to start building it is becoming an authorized user on someone else’s card, said Daugs.
“Make sure you do it with someone with good credit,” he cautioned.
If the account stays in good standing, that will positively impact your credit.
Get a credit-builder loan
Some community banks and credit unions offer credit-building loans, which are designed to help the holder build credit as they make payments.
You’ll pay interest, although some lenders may reimburse the costs after the loan is repaid.
Alternative credit scoring won’t matter
You can boost your credit with alternative solutions, which count bills that don’t normally go onto your credit report. However, they may not work for government-backed mortgages.
Experian Boost can bring up your score on Experian by counting phone, utility and streaming service bills, while eCredable Lift reports utility and phone payments to TransUnion. Perch allows you to boost your score with recurring expenses such as subscription services and rent.
The platforms use a newer version of the FICO algorithm, Rossman said. Government-backed mortgage companies Fannie Mae and Freddie Mac request older versions, so they won’t see the score improvement.
Don’t rock the boat
If you are looking to purchase a home, hold off on any other big ticket items, like a car. Also, don’t open or close any credit cards until after the mortgage is approved, Rossman suggested.
“It is a sensitive time in your financial life,” he said. “Lenders don’t want to see anything weird.”
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