Wondering what you need to do if you're planning on buying your first home? It's simple. Have the best credit score possible. With a good credit score, you'll almost always qualify for the best interest rates and terms on your home loan.
And the less money you pay in interest, the faster you'll pay off the mortgage.
Your FICO Score
Once you apply for a home loan, your lender will take a look at your FICO® score - a three-digit number ranging from 300 to 850. These scores are largely based on your credit reports (statements generated by the consumer credit reporting bureaus that detail your credit activity and current credit situation) and can help creditors assess how likely you are to repay debt.
6 Actions to Avoid
If you're planning on buying your first home in the next year or so, we've identified 6 things you should avoid doing to keep your credit score from dropping. These include:
- Maxing out credit cards. Maxing out credit cards is one of the quickest ways to drop your FICO score. You could drop 100 points easily by doing this. Try to keep your balances below 30% of the available credit (especially during the loan process). A helpful tip: if you're considering paying down the balances, do it over all of your cards, not just one.
- Paying off old collections. Paying off a collection will drop your score right away because of the "date of last activity" category. If you're going to pay off old debt, wait until after closing.
- Consolidating credit into 1 or 2 cards. Consolidating may seem like a smart move, but it actually drops your score because on paper, it looks like you've maxed out the card you're moving the debt onto. Wait until after closing your mortgage.
- Closing credit card accounts. Closing a credit card will actually appear as though your debt ratio has gone up in the eyes of FICO. It also affects things like length of credit history (a longer history is a good thing with credit). If you're set on closing a credit card account, wait until after closing or make sure it's the most recently opened account.
- Falling behind on existing accounts. A simple 30-day late payment on a mortgages or car payments can drop your FICO score anywhere from 30-80 points. Make sure you stay current on all of your accounts.
- Doing anything that will raise the red flag. Other activities that raise the red flag include adding new accounts, changing your name or address with the credit bureaus or co-signing on another loan. It's better to have little activity on your credit report during the mortgage loan process.
One piece of advice that's important to remember: Don't tackle the credit issue completely on your own. Sometimes the task of improving credit can seem overwhelming. You may want to give up. But don't. Feel free to reach out to one of our friendly mortgage advisors at a branch near you. They are always happy to answer your questions and provide some valuable and very doable tips to help you improve your credit standing.
If you're wondering if your credit is good enough to secure a home mortgage, our "Understanding your Credit Guide" can answer many of your questions. It's free!
Provided for general information and not intended as credit counseling, financial or legal advice. Contact your financial representative or tax preparer for more information. Not all borrowers will qualify; contact us for more information on fees and terms.