People wait to visit a home for sale in Garden City, Nassau County, New York, September 6, 2020.
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Mortgage interest rates are close to their historic lows. Still, if you want to take advantage of these rates, check your credit score first.
This three-digit number determines if you can get a mortgage, what type of loan you will get, what you will pay in interest, and potentially how much you need for a down payment. In this hot housing market, it could make the difference in your success, experts say.
The 30-year benchmark fixed mortgage rate is currently 3.090%, according to The bank rate.
“You lock in that rate for potentially 30 years, so you save an incredible amount of interest,” said certified financial planner Faron Daugs, founder and CEO of Harrison Wallace Financial Group, based in Libertyville, Ill.
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Credit scores range from 300 to 850. A good score is 670 to 739, a very good rating of 740 to 799 and 800 and above is considered excellent, according to FICO, a leading credit rating company.
Homebuyers who took out mortgages in the fourth quarter of 2020 had a median score of 786, according to the Federal Reserve Bank of New York.
If you don’t measure yourself, that doesn’t necessarily mean you’re left out of the market. You can perform several moves to improve your score.
Check your credit history
You are allowed one free credit report per year from the three major credit reporting companies: Experian, Equifax and TransUnion. You can contact each of them directly or you can access them via annualcreditreport.com.
Not only do you need to know your score, but you also need to make sure that there aren’t any mistakes or unintentional skeletons in your closet, like a missed payment that you forgot.
Pulling out your report before you apply for a mortgage or pre-approval, ideally a few months in advance, will give you time to correct any issues.
Reduce your credit utilization rate
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Lenders will check if you have high balances on credit cards.
Even if you pay your credit card bills in full every month, you can still have a high usage rate, said Ted Rossman, senior industry analyst at Bankrate and CreditCards.com.
For example, if you make $ 3,000 in purchases and have a limit of $ 5,000, you are using up 60% of your available credit. Try to keep it below 30%, Rossman said. Those with the best credit scores keep it below 10%.
Making an additional payment in the middle of the billing cycle can help reduce the balance before the statement is released.
Late or missed payments can lower your score.
The easiest way to avoid this is to set up automated payments for your invoices, Daugs said.
Some community banks and credit unions offer credit building loans, which are designed to help the owner build credit as they make payments.
You will pay interest, although some lenders may reimburse the charges after the loan is paid off.
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If you don’t have credit, one of the best ways to start building it is by becoming an authorized user on someone else’s card, Daugs said.
“Make sure you’re doing it with someone with good credit,” he warns.
If the account remains in good standing, it will have a positive impact on your credit.
You can increase your credit with alternative solutions, which count bills that are not normally shown on your credit report. However, they may not work for government guaranteed mortgages.
Experian Boost can increase your score on Experian by counting phone, utility, and streaming bills, while ECredable elevator reports utility and telephone payments to TransUnion. Perch allows you to increase your score with recurring expenses such as subscription services and rent.
The platforms use a newer version of the FICO algorithm, Rossman said. Government-funded mortgage companies Fannie Mae and Freddie Mac are asking for older versions, so they won’t see the score improve.