What to Know About Credit Scores Before Buying a Home

Credit scores have long been a mystery to homebuyers, in both how they are determined and how they matter in the long run. Most people think that if you pay your bills on time, you'll have a good score, but our real estate agents can tell you that there is far more to it than that. But while the exact formula used to determine your score is not public knowledge, you still have a great deal of control over it. Here's how you can optimize your credit score and qualify for a mortgage with a good rate.

• Monitor Your Credit Activity
  Federal law requires that you be able to access your credit reports once each year, free of charge. Ignore all the ads you see for quick credit repair and go to the federally mandated site: annualcreditreport.com. Run one report from TransUnion, Equifax, or Experian. Each will have the same information and will vary by only a few points. Check for any item that is not accurate. Such items could be fraudulent use of your name and Social Security number, debts that were paid but still show open, or items older than seven to ten years. A single negative item can drop your credit score by a hundred points or more!

• Pay Down Your Debts
  You may think that paying the minimum balance on time each month will mean you have great credit, but it's important that you don't use close to your limit. You never want your debt to exceed 30 percent of your total credit available. Carrying a monthly balance on a card does not increase your credit score. Paying it off each month does. Many people with high credit scores use one card each month for convenience in tracking expenses, then pay off the entire balance each month. Not only does this practice support a healthy score, but it also eliminates interest payments.

• Don't Chase Credit
  Retailers often lure buyers with special deals if they apply for a store credit card. Credit companies consider the length of time the card has been open, lowering scores for new cards. Be particularly careful when purchasing a car, as multiple credit checks can also indicate poor financial health. Apply for additional credit with as much consideration as you use when considering a major purchase. This is an example of a hidden cost.

• Maintain a Healthy Credit Mix
  Maintaining a few credit cards and paying them off each month will help your overall score, but the scoring model also looks at car loans, cash loans, and mortgages. Making your payments late on any of these, even by just a few days, can really damage your credit score. Just because you make your payment before a late fee is applied, that doesn't mean "on time." Use auto-draft options if you have trouble tracking payments to avoid being late. 

• Understand How Your Score Affects Your Rate
  Mortgage companies offer different interest rates for different credit scores. While you may be able to qualify for a $300,000 home with a credit score of 620, that could mean an APR of about 3.962%. The same loan to a buyer with a credit score of 800 may have an APR of about 2.373%. The difference over 30 years is $93,611!

If you're considering Richmond homes for sale, be sure to contact us for help navigating the mortgage process.