Qualifying for a mortgage to buy a home can be a complicated (and sometimes disappointing) process. Lenders want to see a stable income, a consistent work history and good payment history of your debts. They also want to be sure you’re not taking on more debt than you can afford. Unfortunately, many first-time Atlanta home buyers get a reality check the first time they apply for a mortgage — when the bank pulls their credit report and tells them their credit score is too low.
Obviously, your credit score plays a huge role in whether a lender will qualify you for a mortgage loan. Even if your credit score is within acceptable levels, lower scores can’t qualify for the lowest interest rates, so you might pay more for the same house than the neighbor with excellent credit — or you might be priced out of the home you really want.
The best way to overcome these challenges is to plan ahead. In addition to saving a down payment, take some time to evaluate and improve your credit score before attempting to buy your first home. Here are some key steps to take in that process.
Evaluate your credit
Obtaining your credit report is easy these days; it takes minutes and it doesn’t affect your score. You’re legally entitled to a free copy of your report once a year from each of the three main reporting agencies (Equifax, Experian, and TransUnion), which you can request here. For a bit of money and a deeper dive, you can also subscribe to a credit monitoring service like Identity Guard or Credit Sesame for a monthly fee, which not only alerts you of possible identity theft violations but also gives you access to pull new monthly credit reports so you can chart your progress as you work on improving your credit. These services even offer testing “sandboxes” so you can approximate how your credit would improve by paying off certain amounts of debt!
When looking at your credit score, the minimum benchmark is about 580 to qualify for an FHA loan and 620 for a conventional loan. However, remember that first of all, your credit isn’t the only factor that goes into approving you and, second, the higher your score, the easier it is to qualify for lower interest rates. The closer you can get your score to 700 or above, the easier your qualification process will be.
Report and correct any errors
The first thing to do when pulling your credit is to look carefully for inaccuracies or fraudulent accounts. Most credit reports have some mistakes on them, and sometimes these can unfairly drop your score. If you see a mistake on one of your reports, file a dispute with the reporting agency, which will then contact the creditor to verify the information. If the creditor can’t validate the information within 30 days, the inquiry will be removed from your report. Likewise, if you see any evidence of loans you never applied for, these could be either honest mistakes or cases of identity theft. Report these instances, too, and begin the process for getting them removed.
Pay off or settle bad debts
Negative marks on your credit (e.g., judgments, bankruptcies, late payments and collection accounts) can keep your credit score down for up to seven to 10 years. You can’t do much about these unless they can be legitimately disputed as inaccurate but paying or settling bad debts can definitely bring your score up a few points.
Reduce your debt-to-credit ratio
Many people are surprised to find their credit scores are low despite being current on all their payments. This is usually not because they’re behind, but because they’re overextended — they have maxed out all their credit cards. This problem is perhaps the easiest to fix. Take some time to concentrate on paying down or paying off your credit cards to reduce your debt-to-credit ratio. With otherwise good credit, paying off just one high-balance card can significantly boost your score within a couple of months.
Improving your credit to buy your first home will not happen overnight; it’s a process that may take anywhere from a few months to a couple of years. But by being patient and diligent, you can definitely put yourself in a better position to qualify for the home of your dreams. When you’re ready to begin your house hunt, Atlanta Fine Homes Sotheby’s International Realty is here to help. Give us a call for an appointment at 404.948.4812.