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building credit to buy your home

11.07.17

Purchasing a new home should be an exciting time, but that excitement could be stopped in its tracks without credit. A low-interest loan is important to get the most out of your investment, but that is almost impossible to secure without credit. Getting your credit score in shape needs to be on the top of your to-dos before you start taking the steps towards a home purchase.

 

Why You Need Credit

A credit score is used by lenders to determine your credit risk. The amount of risk involved in working with you is the basis for deciding your interest rate. The better your score, the lower the risk, the lower your interest rate. Without this financial information, lenders don’t have a point of reference for weighing the risks in working with you. This is why having no credit is often worse than having poor credit.

 

How and When to Build Credit

Building credit isn’t difficult, but it takes time. First, you need to take on a line of credit. An easy way to do this is to apply for a low-interest credit card or take out a personal line of credit at your bank. You can use this to pay for items that you would purchase anyway like bills, groceries, gas, etc. Second, it is recommended that you have six months of good credit activity to generate a positive FICO score.

 

Make Sure Your Credit is Good

Your FICO score is one of the first things lenders look to when considering you for a loan. The score needed varies on the type of loan you hope to secure, but in general the higher the score the better. Once you open a line of credit, the goal should be to build up six months of good activity. This includes:

 

Making payments on time and in full.

If you use your line of credit to pay for items within your budget you should be able to pay your bill in full every month. Resist the temptation to use it to purchase big-ticket items that you cannot afford.

 

Reviewing your credit report and disputing inaccuracies.

Many people don’t know that you can dispute inaccuracies on your credit report. Some financial advisors recommend looking over your report from time to time to make sure that all of the information is correct. Whether it’s a misspelling, an out-of-date address, or even incorrect financial information. You can absolutely dispute the inaccuracies, and should. Don’t let someone else’s mistake hurt your chances of buying a home.

 

Not applying for multiple lines of credit.

Part of your credit score is calculated to include new credit inquiries. Each card you apply for opens a new review of your profile and each review lowers your credit score, identifying you as a risk. It’s best to just open the one line and stick with it.

 

Building credit may seem daunting at first, but as you can see, it can be a straightforward process. Just be sure to give yourself enough time to build up a good score before you begin approaching lenders.

 

Investing in a home is an incredible financial decision, but getting into the nitty-gritty of numbers and reports can be exhausting. We at shelter are committed to helping you in every step of the process. To get updates on Denver’s real estate market, receive tips and tricks for seasonal home care, or to just keep up with the shelter team, be sure to follow us on Facebook.

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