How To Build Credit To Buy A House? Things To Know

It makes sense to start establishing your credit history now if you plan to purchase a home in the future. But how to build credit to buy a house?

The interest rate and required down payment for your home loan will be set by lenders based on your credit. Learn some helpful advice by continuing to read.

Table of Contents

Why Is Credit Important In Home Purchases?

Consider your credit score as a rating of your bank’s risk exposure. You run a much lower risk if you have a high credit score than if you have a low one. Additionally, if you have no credit history at all, the bank is unsure of how to view you because you are an enigma. To them, it’s similar to applying to college without providing a GPA because they don’t know what to make of your past performance and are unsure of whether you pose a risk or not.

The total number of times you have used credit to make purchases, the total amount of loans you have received in the past, and the total amount of credit that various businesses have granted you make up your credit score. You might not have any credit score at all if you’ve never financed a car, used a credit card, or gotten a student loan. Thin credit is what you have if all of your past credit cards have been department store cards with infrequent balance maintenance. To give the banks an accurate forecast of your financial future is simply insufficient.

How To Build Credit To Buy A House?

1. Check Your Credit Reports

Reviewing your credit report is the first step to identifying any data that are adversely affecting your score because knowledge truly is power. Run your report through the three major bureaus and use the data to comprehend and manage your credit. You can plan the next steps to improve or maintain your credit before submitting an application for a mortgage with this knowledge in hand.

You must immediately inform the relevant bureaus and creditors if you discover any errors in your report. Make sure to send your letters via certified mail and to include all necessary documentation when filing disputes.

Contact the credit bureau to have these accounts marked as disputed after the errors are fixed. To ensure that your credit score is accurate when you apply for a mortgage, lenders demand that disputes be settled before you do.

2. Monitor Your Credit Score

Your credit report includes important information about your credit score. This three-digit number is crucial to your lender’s choice and influences the interest rate offer you’ll get. Make sure to carefully read over the analysis in your report if your score is lower than you had hoped. With the help of this knowledge, you can begin improving your score.

These are the five main categories that determine your credit score, according to FICO:

Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
New credit: 10%
Types of credit used: 10%

3. Pay Off Delinquent Accounts

The majority of your credit score—35%—comes from your payment history. Bringing any past-due accounts current or paying them off before submitting a mortgage application can mean the difference between getting approved and not getting approved.

Delinquencies are any unpaid balances, charge-offs, collections, or judgments that might be listed in your report. Mortgage lenders can tell you’re a trustworthy borrower if your report is free of delinquencies.

4. Make Payments On Time

Lenders will examine your application to see if your financial habits are consistent. There are no shortcuts to establishing a strong pattern of on-time payments because they are analyzing historical data. Therefore, it’s crucial that you make all of your payments on time. You move one step closer to your dream home while also taking a step toward enhancing your credit history.

After late payments and delinquencies, your credit score needs to be rebuilt. Maintaining current accounts for a few months prior to applying for a mortgage is a good idea if you have these in your report.

While multiple months of consistent payments will help make delinquencies less damaging to your report, keep in mind that they won’t disappear quickly:

Delinquencies stay on your credit report for 7 years.
Your credit report will typically show a bankruptcy for 7 years.
Your report will show inquiries for two years.

5. Avoid New Debt

It’s a good idea to refrain from applying for new loans while trying to raise your credit score because inquiries have an impact on your credit report as well.

Furthermore, new debt frequently raises a red flag for lenders. They see it as an indication of monetary instability and perhaps a lack of accountability. It’s crucial for your application that you have established, long-term credit. This is a significant factor that demonstrates the accountability and dependability that lenders seek.

6. Keep Low Balances

Your debt-to-income ratio (DTI) is the proportion of your monthly income that is used to pay off debts. Your debt-to-income ratio (DTI) is 40% if your monthly pre-tax income is $10,000 and your monthly loan payment is $4,000 (i.e., 40% of your income is used to pay off debt).

Borrowers with low DTI ratios are preferred by mortgage lenders. This indicates you have a higher chance of being able to afford your loan payments each month.

Lenders consider your ratio’s potential impact on your current DTI in addition to that. A home loan shouldn’t push your DTI to an excessively high ratio after it’s been approved. This general rule of thumb aids in maintaining your personal financial stability and is a good way for lenders to confirm that you can afford your monthly mortgage payments.

7. Pay Down Your Balances

You want to approach all of your debt as a monthly bill to the greatest extent possible. Regularly repaying your revolving debts lowers your credit score and is a wise financial practice. Your payment history improves dramatically, and the overall debt is also decreased.

Reduce your balances to 30% of your credit limit as one way to improve your credit score.

8. Keep Your Accounts Open

When balances are paid off, it can be tempting to close your accounts, but this isn’t always a good idea. Lenders examine the ratio of credit that is open to that that is being used when they review your application. The term “credit utilization ratio” refers to this.

Your total credit limit will decrease and your credit utilization rate will rise as a result of account closures. Having a higher credit utilization ratio can also hurt your score.

Due to their indication of financial stability and self-discipline, lenders favor lower utilization ratios. Lenders have a higher level of trust in borrowers who have access to credit but don’t use it all or pay it off each month.

9. Know How Much You Can Afford To Borrow

Having a monthly budget makes it simple to determine exactly how much you can afford to pay each month. When taking out a loan, it is crucial to comprehend your personal finances and have control over your cash flow. It aids you in avoiding taking on debt that you won’t be able to repay, which might damage your credit.

The likelihood of missing or having trouble making payments is reduced if you are aware of the monthly dollar amount that works for your particular budget. To benefit from homeownership without the added stress, pick a home when taking out a mortgage that you can afford comfortably.

How To Reduce Debt Before Buying A Home?

Another thing you should do in order to improve your financial situation and buy a home is to pay down your debt. Lenders consider your debt-to-income ratio (DTI), a mathematical formula used to evaluate your personal finances, in addition to your credit.

Your DTI evaluates the ratio of your total income to your debt payments. Your DTI, which is expressed as a percentage, is what mortgage lenders use to assess your ability to make your monthly mortgage payment. It’s good to have a low DTI because it means your debt-to-income ratio is in good shape. But if this proportion is high, it might indicate that you are in unhealthy amounts of debt.

1. Create A Realistic Budget

Stopping from overspending is the only way to get rid of your debt. Track your purchases and receipts in a spending journal if you’re having trouble reducing your spending.

2. Create A Debt Reduction Plan

Determine how long it will take to pay off your debt and the order in which you intend to do so by taking a look at your income and budget. Try to make extra payments on your other debts while paying more than the minimum amount due on the debts with the highest interest rates.

Schedule a meeting with a member consultant to develop a workable debt-reduction strategy.

3. Create Separate Funds For Specific Goals

It’s wise to keep your goals in mind when creating a budget. You can stay focused and avoid overspending by allocating money for specific objectives. For instance, you might be trying to plan a vacation while saving for your home purchase. Make savings accounts to help you achieve these goals. Start one for a vacation and another for future home improvement projects.

4. Pay More Than The Minimum Amount

Your debt will grow if you only make the minimum payments on your credit card balances or loans, and you’ll end up paying more in interest for the things you’ve bought. If it’s not possible, try to pay as much as you can each month toward your debt. If you can’t pay off the full balance on all of your credit cards each month, at least try to do so.

5. Be Patient

Financial stability doesn’t develop overnight. Gaining the knowledge and developing the skills necessary to make wise financial decisions and kick bad habits takes time.

We feel privileged to be your traveling companions! Members of BECU have access to educational seminars, such as our upcoming Reducing Debt & Building Credit Seminar, which will teach you how to organize your debts, create payment schedules, pinpoint spending problems, and lay the groundwork for changing your financial habits so that you’re in a strong financial position when the time comes to purchase a home.

Final Words

It takes time to build good credit. While it may take some time for negative items to be removed from your credit report, there are a number of things you can do right away to raise your credit score.

Instead of concentrating on what is harming your credit report as you work toward your goal, consider what could have a positive impact. Make sure to keep going in that direction and to keep making wise financial choices.