You worked hard six or seven years ago to pay off your loans, pay down your credit cards, and save up a down payment for a practical little two-bedroom fixer upper. You put a ton of sweat equity in the home, got married, and have made the decision to start a family. Looking ahead, you realize it’s time to move up to a larger home.
Thank goodness you have equity in your home and don’t have to go through that credit-building nightmare again, right?
…Sorry to disappoint. The truth is, your credit score is the single most important factor in determining your eligible rate when buying a home. According to Beverly-Hanks Mortgage Services, any scores over 740 will have access to the best rates, amounting to significant savings monthly and over time. If your score is under 680, you will really start seeing hits in the pricing you will be eligible for—and sometimes the loan program.
Credit scores also impact how expensive your private mortgage insurance (PMI) will be. If you’re planning to make less than a 20% down payment on your next home, your lender will require you to carry PMI. Those companies also take your credit score into account when calculating your cost of insurance.
How to Prepare Your Credit for a New Home Purchase
Since your credit score is the open sesame in your move-up home purchase, it’s important to make sure your accounts are in order before listing your current home on the market or starting your next home search.
First and foremost, it is important to make your payments on time. This is, of course, important to see in your mortgage history. But all outstanding payments are liable to affect your overall credit score. Your first steps should be making sure you’re not behind on any bills.
Other factors impacting your eligible mortgage rate include your balance-to-limit ratio on revolving debt, number of recent credit inquiries (too many is never a good thing), and time since you’ve last utilized any credit. A good rule of thumb is to utilize less than 30% of your available credit card limit(s) and try to pay them off each month.
One thing that often catches people with otherwise good credit off guard are collection accounts from medical or utility bills. Sometimes when people move, they don’t receive mail that could indicate a small balance from a utility bill that rolled over or a doctor’s office visit. When those accounts go to collection, it can impact your credit score by more than 100 points! Check your credit score well before you apply for mortgage preapproval to prevent any surprises.
In short, make sure you’re following these five steps:
- Review a free copy of your credit report for any errors or missed payments.
- Dispute information that is incorrect.
- Pay bills consistently and on time.
- Work to pay down credit cards to below 30% of their usage (more if possible).
- Avoid taking out additional loans or credit lines in the year leading up to your projected purchase.
BONUS: Meet with a mortgage lender to determine your preapproval rate. Preapproval gives you peace of mind as you shop for a home, knowing that you will qualify for the proper mortgage amount.
Get Started Today!
In order to make confident real estate decisions, we believe it is important for you to have timely and individual-specific information. If you would like more information about improving your credit score in order to move up to a larger home, our experts at Beverly-Hanks are here to help you find the best resources to meet your needs.
Contact us today to speak with a Beverly-Hanks mortgage expert.
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— Beverly-Hanks WNC (@beverlyhanks) November 15, 2016