Mortgage Answers: Your Finances and Credit Score
Today we are beginning a series where we will talk answers to mortgage questions.
There are several things to consider before buying your first home. I hear people say all the time that it feels like a daunting task and the whole idea scares them too much to try.
But owning a home can be a wonderful experience and we don’t want to see fear stop you from going after that dream. The truth is, it’s not for everyone. Like so many things in life, you have to consider what’s best for you and your circumstances but we want to make sure fear is not the thing stopping you!
When you think about owning a home ask yourself when are you considering buying your first home? one of the best ways to start this process is considering if you are really ready? Take a look at why you are looking to buy? Are you looking for more space? Is it an investment? Are you just tired of renting?
Once you’ve answered that, the next thing to consider is how your finances look.
How is your income? Is it stable? And a big one… Do you have an emergency fund? Did you just ask What’s an emergency fund? Do you have at least 3 months of your monthly expenses in savings? This is the recommended amount but it could be more. Think all of your bills - your rent, car note, insurance. Do you have enough set aside to pay your bills for 3 months?
And finally, what can you afford? When you look at your budget, what numbers fit?
If you are paying some kind of rent right now, this is a good place to start. How much rent are you paying? Can you afford to pay more in that category or do you need to pay less?
One word of advice… don’t plan to have a mortgage for the full amount you can fit in your budget. You want to leave some wiggle room. A lot of things besides your mortgage payment can change a budget… and many of these are out of your control.
In times of inflation in particular, even basic needs like groceries and gas can increase. There are also things like medical bills, an accident or an injury. Your car insurance can fluctuate based on the type of car you own or if you have any claims. Your electric bill may even fluctuate with the seasons. There many things can change your budget and you never want to max out your budget.
Now that you feel comfortable with how you can adjust your budget, next check your credit. Your credit is a big piece of the home buying puzzle.
Do you know your credit score? There are three credit reporting agencies, Equifax, Experian and Trans Union. You score will vary by agency as each credit bureau places a different emphasis on different things. Your lender will most likely look at the score from each agency, and then take the one that is the middle score.
There are a few ways you can get a credit score easily. You can get your credit report for from annualcreditreport.com. They offer a free report once a year from all 3 of the reporting agencies. You can also purchase just your credit SCORE from FICO.
Another way is through credit or loan statements. Some credit card companies or lenders will include your score on your statement. Pay close attention to the source of these scores because it’s normal to see a slight variance in your score, depending where you are getting it. These can be a good general guide to start with but with so many variables in terms of credit score, it’s always best to speak with your lender for an accurate score based on your loan requirements.
Now that you have your score you can see if there are areas that need work. When you are looking at your score, consider that several things affect your credit score, like how much you owe. Lenders will look at how much credit is available to you, or the limits on your credit cards, and then how much of that you are actually using. The goal here is 30% or less.
Another is having new lines of credit. Opening new lines of credit close to the time you want to take out your mortgage can hurt your score so try to hold off on those if you can.
Lenders also look at the length of your credit history, which is how long you’ve had credit.
Credit mix is another item reviewed. Credit Mix is the TYPE of credit you have. For instance, revolving credit is credit cards. Installment loans are things you’ve agreed to pay back at a specific amount each month like a car loan. Most people don’t realize that cell phone companies actually require credit to take out a contract, so that is part of your credit mix as well. You don’t want just one type, you want a nice mix.
Then there’s the big one - your payment history. This accounts for 35% of what effects your credit score. We’ve said it before, pay your bills on time! It matters and if you don’t, lenders may not take a chance on you.
While you are looking at your score, see what’s effecting it. If you have any liens or collections, you want to get those paid before you apply. That can make a real difference not only in getting a loan but your interest rate.
If there are issues, and you need help, you can speak with your bank or credit union for guidance. Sometimes it’s as simple as writing a letter to a creditor to clear up an issue. The key is, take care of all that you can before applying.
Now that you know what’s going on with your credit, if it’s good, keep it that way! Make your payments on time or even early! Avoid new lines of credit and basically maintain that credit until you buy.
Another thing a lender will look at besides your credit score is all your accounts. This includes all your savings and checking accounts. We will talk about the paperwork you need more in another post, but having your account information is all part of making sure your financial health is where it needs to be.
One thing you will need to bring for your mortgage application is your bank statements. Before you apply, you want the down payment to be in your account and show on one of the statements you are providing. That should be in order before you begin the application process if you can. Also, try to avoid any large deposits and withdrawals through this process. Basically, you want your account to look like it would on a normal day, otherwise it’s difficult to access what your finances really look like.
As you get ready for the step of applying for your mortgage, we recommend you find a mortgage lender to work with. Find someone you can trust that will guide you through this process. You can start with your bank or credit union. Also, if you have people in your life that have gone through this already, ask them who they trust and see if they have any recommendations.
This process can be confusing and overwhelming if you let it. But it doesn’t have to be. There are people ready to guide you through this journey and help you buy your first home! Are you ready? Let’s get started!