Are you one of those who put their home buying dreams on hold for what seems like a long time? Then, it’s time to get cracking on your real estate goals by seriously considering a move to Boise, ID. Named the best place for millennials to live in 2019 by Livability.com, this midsize western city boasts a vibrant downtown, a thriving coffee culture, and a burgeoning tech market, along with other features that make it attractive for homebuyers under 40.
To clear the path to buying your first home, one of the most important first moves you can make is to ensure your credit score is attractive to lenders.
In this article, we’ll tell you the following:
- Why it’s important to have a good credit score
- The difference between good and bad credit scores
- The different ways you can improve your credit score
WHAT IS CREDIT SCORE AND WHY IS IT IMPORTANT?
Your credit score represents your creditworthiness. Lenders use your credit score to determine whether or not to approve your loan application, and how much interest rate you will pay. Scores can range from 300 to 850, and within that range, you can be rated as:
- Poor (300-629)
- Fair (630-689)
- Good (690-719)
- Excellent (720-850)
A good credit score ensures you’ll qualify for loans for homes for sale in Boise, ID. The higher your credit score, the better your interest and terms of credit will likely be. On the other hand, a low credit score limits your purchasing power and possibly ruin your chances of securing a loan.
HOW ARE CREDIT SCORES CALCULATED?
Credit bureaus are the entities that determine your credit score. Although there are several different credit bureaus, only three are universally recognized – Equifax, Experian, and TransUnion. To compute an individual’s credit score, these bureaus take into account the following components and how much weight they carry in determining your score.
Payment history • 35%
Your payment history will show if you pay your bills promptly, if you’ve missed payments, how often you’ve missed them, and so on. Any late/missed payment, default, foreclosure, and bankruptcy will negatively impact your score.
How much you owe • 30%
This takes into account the sum total of all your current loans and how much credit you have left. Your credit score could be affected if you have high remaining balances. In contrast, small balances and loans close to being paid off may raise it.
Credit history • 15%
Your credit score gets a major boost when you have a long history of prompt payments. Although it’s ideal to have no debt at all, it can actually hurt your score if you have no credit history for lenders to review. This is why you might want to keep unused accounts open as a way of keeping your history active.
Type of credit • 10%
Credit bureaus will also consider the different types of credit you currently have. Having a mix of credit accounts, including credit cards, mortgages, student loans, auto loans, personal loans, etc., may improve your score if you can show lenders you can effectively manage multiple payments simultaneously.
New credit • 10%
A recently opened credit account impacts the length of your credit history. Lenders can interpret it as a sign of financial trouble, which can bring your score down. That said, credit bureaus have systems in place to recognize whether or not a new account makes a potential borrower a bigger risk.
HOW DOES YOUR CREDIT SCORE AFFECT YOU?
Everyone has individual credit scores. Even if you are married, you and your spouse will still have separate credit scores. In the event that both of you become co-signers on a loan, both of your scores will be evaluated by the lender.
If your credit score is in the excellent category and you were to borrow $300,000 using a fixed- rate, 30-year mortgage, a lender might charge a low 6.0% interest on the loan. This means a monthly payment of $1,702. However, if your score is in the lower range, lenders might charge you 8.0% which would result in payments of $2,025 a month for 30 years! In this case, an excellent credit score will save you a total of $116,280 over the life of the loan. Think about what you could do with all that extra money!
Disadvantages of a low credit score
A bad credit score does not only make you pay much higher interest on loans and mortgages, it can also make your life more difficult in a number of ways. Here are just a few:
- Lenders will think twice about letting you borrow money when you shop for homes for Sale in Boise, ID. Simply put, a low credit score makes you more likely to default on a loan.
- Your insurance premiums may increase. Although a bad credit score will not increase your premiums directly, it can keep you from qualifying for the best possible rates for houses for sale in Boise, Idaho.
- You’ll have a harder time owning a home. Since a bad credit score negatively affects your ability to get an affordable mortgage, you may end up unable to complete payments on your home should you run into financial troubles later on.
- You may be forced to delay retirement.High monthly payments delay your ability to build wealth. As long as your interest rates are high, you’ll be unable to save and also have less equity on your home, thereby adversely impacting your long-term financial health.
Benefits of an excellent credit score
A high credit score can be the key to enjoying the following benefits:
- Better rates on insurance. Mortgage loans for houses for sale in Boise, Idaho typically come with homeowners insurance. A good credit score can help you save money on the premiums.
- More housing options.Scoring a good interest rate on your loan opens up many real estate opportunities for you, giving you better buying power.
- You’ll be in a better position financially. A good credit score gives you more equity in your home and puts more money in your pocket. You’ll be better protected from the risk of going underwater on your mortgage, and you’ll also have access to more funds when you need the money most.
HOW DO YOU CHECK YOUR CREDIT SCORE?
Your credit score is contained in your credit report. You can obtain your credit report by doing the following:
Request a credit report from a credit bureau
Refer to your bank, credit card, or loan provider
Consult a credit counselor
You can request a free credit report from the credit reporting agencies Equifax, Experian, and TransUnion. Credit scores are also obtainable from FICO and VantageScore, albeit at a fee.
Many lending institutions provide clients with monthly credit statements. Borrowers can often find their credit scores in these statements or by logging into their online accounts. Depending on your loan provider, you may have to opt for a particular service to know your score.
Credit counselors offer a variety of services, including obtaining your credit report and reviewing the details with you. Find a credit counselor in your area by visiting the National Foundation for Credit Counseling (NFCC) website.
Once you have your report, it’s important to check the report itself for any errors or inaccuracies that could be keeping your score low. Depending on your number, you may have to take steps to improve it before buying your first home in Boise, ID.
WHAT ARE TIPS TO IMPROVE YOUR CREDIT SCORE?
If your credit score is in less-than-ideal shape, don’t worry. There are ways to clean it up and put you in a better position to buy Boise houses for sale. Here’s what you can do:
Pay your bills promptly
Negotiate with your lender
Increase your credit limit
Become an authorized credit card user
Don’t cancel credit accounts
Don’t open new accounts
Don’t max out your credit cards
Improve your debt-to-income ratio
Work with a credit professional
An investigation by Consumer Reports estimates that at least 34% of borrowers have an error on their credit report that’s negatively impacting their score. Some of the common mistakes include incorrect balances or credit limits, receiving somebody else’s credit account, repeat items, misreported delinquent accounts or default statuses, fraudulent loan accounts, etc.
You’ll need to dispute any possible mistake with the credit reporting company to correct them. Send the company a letter containing personal information, your account details, the mistake you want to correct, and why it needs to be fixed. The Federal Trade Commission (FTC) provides a sample letter for you to follow.
The best and simplest step you can do to improve your credit score is to commit to paying your bills on time. If you often make late payments, now’s the time to do better, because one late payment 30 days past due can reduce your score by as much as 100 points! If you often forget to pay your bills, sign up for automatic payments to ensure it’s done consistently.
It’s not unusual to make a late payment or two, and many credit companies are considerate enough to erase them from your report if you ask them. As long as your late payments are minimal and not persistent, asking your lender to erase late payments is an easy way to boost your credit score.
When your credit limit is higher and your balance remains low, your overall credit utilization is instantly reduced, in turn improving your credit. Different credit card companies will let you do this online. As long as you’re diligent with your payments, the process will be very easy and quick.
Do you have a relative or friend with a higher credit score than yours? If they can add you as an authorized user, their positive credit card history can benefit your score. Even if they don’t give you a card at all, the simple act of listing you as an authorized user is enough to raise your score significantly, especially if you have a thin credit file.
Closing a credit card account can do more harm than good. Longer payment histories are a huge plus to your credit score, and if you cancel them, you reduce the average age of accounts on your credit report. This can adversely impact your credit history and credit utilization, thereby lowering your credit score.
Even if you don’t use your credit card often, it’s still in your best interest to keep it open. Credit bureaus will use your open accounts to evaluate how you manage different credit types. You’ll have a healthy credit mix when you have a diverse range of active credit accounts in your name.
Just like closing an old account, opening a new one can also reduce the average age of your accounts. Likewise, lenders will perform a hard inquiry on your credit report every time you apply for credit, which can shave off a few points from your score. Avoid applying for new credit if you’re planning to get a mortgage, and allow your current accounts to age – the older your credit history, the more positively it affects your score.
While it can be tempting to spend up to your credit card limit, doing so can jeopardize your chances of getting a mortgage. Max out your card and your credit utilization ratio hits 100%, which can be concerning to lenders. Consequently, your payments could skyrocket due to added interest rates and charges. When this happens, your credit score will take a serious hit and so will your future borrowing prospects.
Your debt-to-income (DTI) ratio represents the proportion of your income dedicated to debt payments. A high DTI indicates to a lender that you have trouble managing your debt load, thus preventing you from getting a new loan or line of credit approved. To compute your DTI ratio, you can use a DTI ratio calculator or have a credit professional do it for you.
Lenders prefer a DTI ratio of 36% or less. If your ratio is high, you can lower it by taking a second job or side business, negotiating a raise, finding a higher-paying job, or enrolling into a debt consolidation plan to lower your monthly credit payments.
A reputable credit repair service provider can handle every aspect of your credit score improvement goals and make the process as stress free as possible for you. These companies can help you correct errors, update your account status, negotiate lower monthly payouts, and more. They can even be your direct link to credit bureaus to ensure positive changes are happening to your score. If you’re having trouble raising your credit score on your own, working with a certified credit professional may be the best option for you.
HOW DO YOU GET A MORTGAGE LOAN IF YOU HAVE A LOW CREDIT SCORE?
What if you can’t boost your credit score despite your best efforts? Though it can be challenging, it’s not impossible to find a good mortgage loan to qualify for. There are available options for you if you want to buy a home but your credit isn’t that great. Here are a few tips to help you make it happen.
Discuss your borrowing plans with your lender
Have a co-signer
Talk to a credit union
Many lenders are willing to grant personal loans to borrowers with low credit scores. Keep in mind that the loans you may qualify for may mostly be high-risk loans with high interest rates. As you shop for loans, make sure you’re aware of the total amount you need to pay each month and your due date. You certainly don’t want to take out a mortgage you can’t afford. Use a mortgage calculator to compute monthly payments and plan your budget.
Some lenders are willing to take into account other assets to assess borrowers. Examples of alternative assets include real estate, inventory, marketable securities, accounts receivable, and the like. Your chances of landing a mortgage with ideal terms could increase if you can convince your lender to factor in any alternative asset that you may possess.
A co-signer is someone who agrees to take on the loan with you. Having a co-signer makes it easy for those with low credit scores to qualify for a loan, especially if that person has a high credit score and a solid credit history.
Be very clear that you and your co-signer know what you are both signing up for when you take out a loan, as many relationships have been ruined by this setup. Keep in mind that if you can’t pay back the loan, your co-signer will have to pay the rest of the amount and your inability to pay will damage their credit rating. Only co-sign if both of you can handle the risk that you may default on the loan in the future.
Credit unions are not-for-profit entities that often have flexible requirements for lending money. Some credit unions allow borrowers to get a loan without a credit check. Likewise, alternative assets are often considered, allowing you to secure more favorable loan terms such as low interest rates, higher loan amounts, and/or extended repayment periods. Use this credit union locator from the National Credit Union Administration (NCUA) to find the agencies nearest you.
The Hoyte Group Real Estate has helped many first-time home buyers get on the right path to home ownership. We can handle every aspect of your real estate transaction and you can trust us to always put your interests first.
Let the Hoyte Group Real Estate help you find a place to call home in Boise, ID. Call 208.999.3076 or contact us here to get started.