Checking Your Credit Before Buying a Home

Checking Your Credit Before Buying a Home

The American dream has always been to own your own home and your Better Homes and Gardens® Real Estate agent is there to help you achieve that goal. A key component is to understand what finance companies look for when considering an application. This knowledge can go a long way towards helping you finally purchase your new home. Finance companies typically look at two very important factors when deciding whether or not to approve a loan application. The first factor is your income to debt ratio and the second is your credit score. If home buying is in your future, checking your credit score now is an essential first step.

If you are like most people, you most likely have not given your credit score much thought. Now that you are in the home buying market, knowing your credit score is very important. Although there are numerous companies that will provide you with your score for a fee, the federal government has mandated that each consumer is entitled to one free report each year, which includes the three major credit reporting bureaus. Your free report can be accessed at once a year. The report will provide you with your score from Experian, TransUnion and Equifax. Once you have reviewed your report for accuracy, you can challenge any inaccuracies by following the procedures outlined by each of the individual credit reporting agencies. You may also choose to subscribe to one of the many services that offer assistance to keep an eye on your credit score for you to be certain your score remains in the acceptable range as you get closer to the actual home buying process.

Your credit score will have a direct and significant impact on what type of financing you qualify for, as well as the interest rate you are offered if approved. Individual finance companies set their own guidelines for what is considered an acceptable score; however, an average score of over 600-650 is usually required in order to qualify for conventional financing. The higher your score, the lower your interest rate will be as well. In general, finance companies look for scores over 720-750 to qualify for the lowest interest rates offered by the lender at the time of application.

Lenders also look at your debt to income ratio. In essence, this means how much debt do you have compared to the income you earn. If you earn $5,000 a month, but your debt is $2500 a month, you have a debt to income ratio of 50 percent which is too high for conventional financing. Check with your potential lenders what debt to income ratio they typically look for.

If your credit score is not where is should be, you can take some additional time to try and pay off debts and raise your score, or you can look to non-conventional financing. If your scores are in the acceptable range, check with your lender to see if you can get pre-approved which will give you an idea of how much home you can afford and what your monthly payments will be. Be sure you are actually getting pre-approved, not pre-qualified. “Pre-qualified” simply means the lender gives you an idea of what you will qualify for based on information you supply, whereas getting “pre-approved” typically requires you to fill out an official application, pay a fee, and submit to a credit check.  This will ultimately provide a more accurate estimate of what you will be approved for when you decide you purchase your dream home.