Choosing a lender isn't the first step in becoming a homeowner. In reality, the home buying process begins with your finances. Without a reasonable FICO score, buying a house is more difficult and, you could end up renting longer than you expected in NAPA, California until you raise your score.
A FICO score is a review of your years of credit history based on a model developed by Fair Isaac and Company. The score ranges from 300 to 850, with most people normally having a score of 650. Since we've experienced an economic downturn, however, some people have seen their score drop by hundreds of points because of underemployment, closed credit card accounts, or credit card accounts closed by the lender due to inactivity. Some of the factors in determining your FICO score include:
- Credit to Debt Ratio — How much do you owe versus how much credit you have available?
- Credit Inquiries — Do you have too many open accounts?
- Types of Credit — Do you have a healthy mix of loans and credit cards?
- Payment History — How often do you make late payments?
In reviewing your credit history, you'll discover that you actually have three reports. Experian, Equifax and TransUnion — three of the major credit reporting agencies — use a slightly different models to determine your credit rating. FICO is used by Experian. Equifax's model is called BEACON and TransUnion uses EMPIRICA. This means you have three scores, one for each bureau.
When you apply for a mortgage or any other loan, lenders want to make sure that extending a loan to you isn't a risk. Your credit score gives lenders view of what type of borrower you'd be solely because of your credit history. You'll need a score of at least 700 to get a acceptable interest rate. You can qualify for a loan with a lower score, but the interest accrued over time could be more than double the amount of an individual with a stronger FICO score.
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Improving your credit score is the first step in owning a home. Call us at 707.337.3276 and we can help you get on the right track to the home of your dreams.
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How do you obtain a higher score? Building your FICO score takes time. At RD Team Realtors®, we know it's difficult to make a significant stride change in your number with small changes, but your score can improve in a few years by keeping tabs your credit report and by using credit extended to you to raise your score, instead of ruin it. The most important thing is to know your FICO score. Here are some ways you can improve your credit score:
- Even out your debt. At first, this doesn't sound like a good idea. But, you don't want to have one card that is at the limit and have your remaining cards at a zero balance. It's better to have each of your cards at an even balance than to have the most of your debt transferred to a single card.
- Department Store cards and gas cards. For those who have non-existent credit or low credit, chain store credit cards and gas credit cards are ways to obtain credit, increase your spending limits and have a solid payment history, which will raise your FICO score. Simply avoid keeping a balance for too long because these types of cards usually have a surprisingly high interest rate.
- Keep your cards in rotation. Whether you have older cards, or are just getting started with credit, be sure to use your cards so that your accounts maintain an active status. But, make sure you pay them off in no more than two or three payments.
- Keep up with payments. Late payments hurt your credit history. It's where people who have recently been unemployed see the biggest dip in their credit score. Yes, it takes longer to restore your credit this way, but it's the most reliable way to prove that you're able to make payments to a lender.
- Correct your credit report. If you discover mistakes on your credit report, write to the bureau asking that the item be removed. If you have a common name or the same name as a family member, you'll want to give extra care to make sure the activity reported is correct.
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Knowing the ways you can raise your FICO score, you can move toward becoming a homeowner. Keep in mind that when you're ready to apply for a loan to purchase a house, you'll want to keep your credit inquiries within a two-week window to avoid damaging your credit score. With the help of RD Team Realtors®, shopping for a mortgage is sure to go more smoothly so you, too, can become a homeowner.
Get more information by visiting www.myFICO.com, Fair Isaac's informational site and once per year, for free, you can review all three of your credit reports at www.annualcreditreport.com. And, for a small payment, you can get your FICO score from each bureau on their websites: www.equifax.com, www.experian.com and www.transunion.com.
At RD Team Realtors® we work with all tiers of credit scores and can help you step into home ownership with the best lender for you. E-mail us at saljramos@gmail.com or call 707.337.3276 for more information.
