First time home buyer’s — this one’s for you! Over the past six months, we’ve witnessed a massive shift in the housing market. With heavy influence from the COVID-19 pandemic, interest rates were at an all-time low, appreciation skyrocketed and everyone wanted a piece of the pie. The previous two years haven’t been particularly welcoming to buyers, let alone first-time home buyers just entering the housing market.
Come June 2022, all that changed. The market normalized as interest rates increased, appreciation slowed and more homes for sale entered the once limited pool of housing inventory. With the current housing market in favor of buyers, it’s imperative buyers prepare themselves and their finances to facilitate a smooth home buying process.
Before driving across the Greater Phoenix area, visiting all the magnificent homes under the warm desert sun, buyer’s need to address the not so glamorous part of the home buying process — understanding their buying power. The first step to determining one’s buying power, is speaking with a lender and unveiling their financial situation. This process is known as the pre-qualification process. To help you best prepare for getting prequalified, you’ll want to pay extra attention to your credit, debt to income ratio and down payment. Here, we will be focusing on credit.
Your credit score is a number ranging from 300-850 and is used to determine your creditworthiness. Factors such as monthly payments, length of credit history, amount of credit accounts, types of credit and more are used to calculate your specific credit score. Lenders favor higher credit scores, as it indicates a level of financial responsibility. Most mortgage loans have a minimum credit score requirement. The minimum score varies depending on the type of loan. According to Rocket Mortgage, national mortgage load provider, the minimum credit score for a conventional loan is 620. Government backed loans, such as FHA, cater to individuals with lower credit scores and allow scores as low as 580.
While it’s extremely helpful to have programs that are inclusive to lower credit scores, it comes with a price — loans with lower credit requirements typically offer higher interest rates, which result in higher monthly payments. How about that for a catch-22? For this reason, professionals highly advocate working on increasing your score to give you the best possible loan option.
The first place to begin with credit improvement is knowing and understanding your credit score and credit report. Individuals can gain access to their credit information by various means, including annualcreditreport.com, their banking institution or credit-keeping apps such as Credit Karma. By viewing your specific credit report, you will see the exact factors that contribute to your score.
Although everyone has different credit improvement needs, there are several tips that can benefit all, as certain financial activities can carry more weight than others when it comes to impacting your credit. The first is your payment history. Be sure to pay all of your payments on time and never miss a payment. Missing a payment will negatively impact your credit score, so try your hardest to avoid any late or missed payments at all costs. Auto-pay is a great tool to ensure making your payments on time!
Hack number two is keeping your credit card use under 30% utilization — 10% is even better! A simple example is if you have a credit card with a maximum limit of $1,000, you should try not to use more than $300 of that $1,000 limit within a statement period. However, the real hack is not about decreasing your spending but rather increasing your limit. Try reaching out to your banking institution and request a limit increase. With a limit increase, you can allow yourself more wiggle room with your spending and can take advantage of having a lower utilization ratio. Another vital aspect to this hack is paying off your credit card before each statement due date. This will prevent interest charges on your account and will facilitate responsible spending if you know you have to pay off the outstanding balance each month.
The next highly weighted factor is addressing any derogatory marks, such as collections or public record items like bankruptcies, civil judgements or liens. If you see any mistake on your report, you can always dispute the claim. If you happen to have any items in collection, contact the collection company and arrange a payment plan to pay off the debt. Removing any derogatory mark will greatly enhance your credit score!
Believe it or not, the age of your credit matters. If you’re young and reading this, go to your banking institution and open a free credit card. Only use it for manageable expenses, if it’s your first credit card, and pay it off every billing statement. Think of it as a designated gas or grocery credit card and only use it for those expenses. When you’re 35, you’ll thank your younger self for opening a credit card so young! If you’re on the older side, be mindful about keeping your oldest accounts current, by making occasional purchases and limiting how often you apply for new lines of credit.
Funny enough, the lowest impact on your credit score is having your credit pulled — which tends to be the most common concern for first time home buyers. Many are hesitant the credit inquiry will severely decrease their score and put off, or avoid entirely, speaking with a lender to begin the prequalification process, thus missing out on their chance to buy a home and begin building equity — and credit! This irrational fear couldn’t be further from the truth. According to Credit Karma, hard inquiries is listed at the bottom of their low impact on credit score factors list. In fact, Jeff Richardson, vice president of marketing and communications, at VantageScore Solutions states, “after you’ve made on-time payments for a few months, the impact of that hard inquiry should go away or diminish.”
Whether you have a high credit score, or a lower one, there’s always room for improvement. By utilizing the tips above, you can enhance your score and set yourself up to obtain the best possible loan for your situation. Don’t let the fear of having your credit pulled stop you from one of the largest credit bumps you can do for yourself — acquiring a home mortgage and building equity. JN
Ophir Gross is a realtor with Coldwell Banker Realty and has a combined skillset of business strategy and consumer psychology. She is a member of JNFuture Root Society, Women in Philanthropy, NowGen Phoenix, attends Congregation Beth Tefillah and began her roots in the community at the Phoenix Hebrew Academy and, formerly, Jess Schwartz High School. She can be reached at email@example.com or 480-794-0807.