Even before you begin searching for a home, there are many things you can do to smooth the process and get the best interest rate on your mortgage. An important component is your credit score, which lenders use to determine your risk factor. Three credit bureaus—Experian, TransUnion and Equifax—use what is called a FICO score to determine your rating.
Potential borrowers with high credit scores, generally 720 or above, are much more likely to get a favorable rate. A credit score is based on your payment history, how much you already owe, how long you’ve been getting credit, any new credit you’ve taken on and the types of credit you have. You payment history tops the list as the most important, so paying your bills on time and in total is very important.
Your history also includes the number of accounts you’ve agreed to pay, how you have paid them and whether you have past due accounts.
What types of credit do you use? A mix, such as department store revolving charge accounts and credit cards, plus installment plans, give the best picture of how you handle your financial responsibilities.
Are you just beginning your foray into building credit? You can open accounts to start, but don’t dig a deep hole. Be cautious and judicious so that you don’t overspend and get into financial trouble. You should begin your credit history long before you consider purchasing a home.
As you move toward home ownership, it’s best not to make any big purchases that would increase your financial responsibilities, such as buying a new car, financing an expensive vacation or purchasing that new sound room system. Keep your purchases simple and in line with your income.
You have a right to check your own credit score to make sure you are a good risk. Also, you can examine the report to see if any of the information is incorrect or unfair. If you begin building your credit score now, when mortgage time comes around you’ll get the best deal possible.
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