For many, the symbol of independence, security and prosperity is the key to the front door of a new home. Before you get that key, there’s another key you need to craft: your credit score. This score is a numerical representation of your credit history as an indicator of your ability to pay your bills. The score factors into your housing situation, from how much you can afford to the interest rate you get.
Three credit monitoring agencies provide credit scores: TransUnion, Equifax and Experian. Each has its own method to determine scores, so your number may vary based on the agency. Paying off debts, paying on time and using a small percent of your available credit increase your score. Missing payments, opening many credit accounts and carrying a significant balance of debt decrease your score.
Your score grouping is important, too. Lenders assign borrowers into four categories: sub-prime, near-prime, prime and super-prime. Super-prime lenders get the lowest rates because they’re the lowest risk for the lender. Sub-prime and near-prime borrowers have a lower limit for the loan amount they can borrow and generally pay a higher interest rate. Sub-prime borrowers have the fewest (and costliest) lending options. If you have a low score, a good target to get to is 640, which usually puts you in the prime group. For building good credit, 740 and above give access to the best rates and terms available.
If you plan to house-hunt in the next year, three steps you can take now can improve the terms of your mortgage. Check your credit score, take steps to raise it and manage your loan in other ways.
Check your credit score - You can check your credit report for free once a year at annualcreditreport.com. With City CU’s Advantage Checking, you get a free report every 90 days.
Boost your credit score - Develop a 6-12 month plan to improve your credit score before getting your mortgage: make sound financial decisions, demonstrate to lenders you can use credit responsibly and get your balances to zero.
What else? - If your credit score is low, you may need other ways to get a better position on a loan, like a higher down payment, finding a less expensive house or having a co-signer as a responsible party to take on the risk of the loan. If you have serious debt, buying a house might not be a good short-term plan. Paying off debt and saving for a down payment are your “keys” to home ownership.