You’ve decided: it’s finally time to purchase a home. You know how many bedrooms you want and what neighborhood you’d like to live in. You’ve looked into all the acronyms like HOA and FHA and VA. But what about FICO? Yes, before you can get into the fun part of home shopping, first comes the credit check.
Before you can secure a home mortgage loan, banks run checks on your credit. Unless you’re independently wealthy or a Mega Millions lottery winner, most people get mortgages. Lenders need reassurance that you’re going to pay them back on time as promised. This is done by looking at your FICO Score, which shows a history of your repayments.
Ranging from 300 to 850, your credit score is calculated by three major bureaus: Experian, Equifax, and TransUnion. They’re very detailed and calculate pretty much every payment you’ve ever made to any debtor, and when. Certain types of repayments hold more weight than others.
Your score is broken down like this: 35% repayment history, 30% debt-to-credit-limit ratio, 15% length of credit history, 10% types of credit, 10% new accounts. You’ll get dinged most for late or delinquent payments. However, your score may tick up an inch by having varied types of credit (a blend of credit cards, retail cards, or auto loans). In short, banks want to see that you aren’t stretched too thin and that you make your payments on time.
According to Realtor.com, it goes like this: The better your credit history, the higher your score—and the better your opportunities for a home loan. The Federal Housing Administration requires a minimum credit score of 580 to permit a 3.5% down payment. Major lenders often require at least a 620, if not more.
Two Simple Fixes
If you’re short of that mark, there are easy ways to repair your credit. You can erase one-time mistakes. Say you’ve missed a payment or two (Hey! Life happens!), call the company that registered the late payment. Removing it could be as simple as asking! This may not work if you have a history of late payments. If it’s only happened a time or two, companies can certainly ask their reporting division to remove the ding from your credit report.
Another idea that may seem counter intuitive is to call and ask for an increase to your credit limit. Now, just because you may get an increase doesn’t mean you should USE it. The whole point is to show restraint. For example, if you have a credit limit of $1,500 and have $1,000 out on that card, your ratio of debt-to-credit-limit is higher. That same $1,000 on a $5,000 limit shows you’re using a much smaller percentage of your available limit.
More than anything, be patient with yourself. The easiest way to take your credit score into your own hands is to commit to on-time payments and to give yourself time.