So you’ve decided you want to buy a new home in the near future, but you aren’t sure you’ll be able to get approved. Lenders use things like employment history, annual income, and credit scores to determine whether you’re eligible for a loan or not.
We’ve compiled a list of things you can do to monitor, manage, and improve your credit scores. Keep in mind, increasing your credit score is much like weight loss: there is no magic pill. It requires consistency and patience.
Where do we start?
Do you know what your credit score is? There are free online services, such as Credit Karma, that allow you to monitor your credit. Contrary to popular belief, keeping an eye on your credit score won’t result in any damage to your credit. In fact, it can keep you well informed about your overall financial health and security.
Well, it’s looking a little lower than I thought it would….
Don’t panic. Just like certain actions reduce credit score, certain actions can improve your credit score.
What’s the game plan?
Set up auto pays. Make paying bills on time as hassle free as possible. Schedule reminders on your calendar when bills are due to withdraw from your account, so you have a good idea of where your bank balance is.
Budget. In order for auto pay to function well, one first needs to make sure there’s always enough money in the bank to cover the auto drafts. Some people schedule all bills to come out on the same day, some people opt to spread it out. Consider what will work best for you, and make a plan.
If you can show consistent payment history, you may rack up some points on your credit score.
Let’s discuss debt to income ratio (DTI):
Another thing lenders have to consider when qualifying you for a loan is your debt to income ratio. DTI compares expense and earnings; how much of your income goes to paying off debts? A lower debt to income ratio shows lenders that you’ll have funds available to pay your mortgage on time every month.
To calculate your DTI:
Calculate monthly debts - car loans, credit cards, student loans, child support, etc.
Gross monthly income - income per month before tax deductions
Take your monthly debts and divide them by gross monthly income = DTI%
(Don’t forget to move the decimal over)
To work towards lowering DTI% percentage:
Budget for an increased payment or extra payment towards your debt.
Consider setting up auto pays for these debt accounts (further solidifying a consistent payment history).
Avoid opening new lines of credit or making any large purchases.
Focus on keeping lower balances on all debt accounts.
Pay down credit cards with higher interest rates first.
These tips will help you monitor and manage your credit scores. However, if you find that your score is in need of some real repair, don’t be afraid to give Imagine Home Lending a call. We work closely with credit repair professionals who can get you on the path towards home ownership.