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6 Ways to Get Financially Fit for Homebuying Season

Dan Rafter — Mon, 02 Apr 2018 09:00:06 +0000

The housing market is a competitive one right now. The National Association of Realtors reported that there were 1.52 million existing homes for sale at the end of January 2018. That might sound like a lot, but that figure is 9.5 percent lower than it stood a year ago, when 1.68 million homes were for sale.

What does that mean for you? It means that if you're planning on buying a home this year, you need to be financially fit and ready to act fast. Here are the steps you can take to get ready for homebuying season.

1. Check your credit reports

When you apply for a mortgage to finance the purchase of a home, your lender will check your credit reports. You have three of them, one each maintained by Experian, Equifax, and TransUnion. These reports list your loans and credit card accounts. It also lists any financial missteps you might have taken, such as missed payments, late payments, bankruptcy declarations, and foreclosures.

You can get one free copy every year of each of your three reports from AnnualCreditReport.com. Once you get your reports, look them over carefully. You want to know what lenders will see. If you spot any mistakes — such as a late auto payment that you know you paid on time — correct the mistake with the offending credit bureau, either by phone or email. Finding and correcting incorrect information can provide an immediate boost to your credit score, which will set you off on the right foot for buying a home. (See also: How to Read a Credit Report)

2. Check your credit score

Your credit score is a key number when you're ready to buy a home. Your lenders will study your credit score to determine how likely you are to pay your mortgage on time each month. Most lenders consider credit scores of 740 or higher to be strong ones, while scores under 640 make them nervous. If your score is too low, you probably won't qualify for a loan. If you do, you'll be charged higher interest rates.

It's important to know your credit score before you apply for a mortgage. You can pay to receive your score from any of the three credit bureaus, which will cost you between $10 and $15. Your credit card provider or bank might provide you with a credit score for free, but be careful: This free score might not be an official FICO score, and might not be the same one that lenders see when you apply for a loan.

Once you know your credit score, you can determine if you need to take steps to improve it. If your score is too low, it might make more sense to wait until it rises before you start hunting for a new home. (See also: 7 Ways to Increase Your Credit Score Quickly)

3. Start a new history of paying all your bills on time

The best way to build a strong credit score is to pay all your bills on time every month. If you pay certain bills late — credit cards, mortgage, auto loan, student loan, and other forms of installment loans — your credit score could drop by 100 points or more. A bill is considered officially late and reported to the credit bureaus if you haven't paid it by 30 days or more past its due date.

Rebuilding your credit this way takes time. Depending on how weak your score is, it could take months or more than a year of on-time payments to increase it to a level that will qualify you for lower interest rates. The work, though, will pay off in the form of lower monthly mortgage payments. (See also: All the Ways Minimum Payments Are Evil)

4. Pay down your credit card debt

Another way to boost your credit score and gain approval for a mortgage loan is to pay off as much credit card debt as possible. You'll know you're ready to take on the homebuying process when your credit card balances take up no more than 30 percent of your available credit.

Paying down your debt is important, too, after you buy a home. Your mortgage payment is a big financial responsibility. Having as little additional debt as possible will ensure that these new payments are not an overwhelming burden. (See also: The Fastest Method to Eliminate Credit Card Debt)

5. Build up your savings

Buying a home is expensive. You'll have to come up with a down payment, of course. But you'll also have to pay for closing costs on your mortgage loan, and don't forget the added expenses of paying for movers, new furniture, and any repairs that your new home might need.

Build up your savings before you start searching for a home. This will also help you when it's time to apply for a mortgage. Lenders usually want to see that you have enough in your savings accounts to pay for two to three months' worth of mortgage payments. That way, you can still make your mortgage payments if you hit a financial crisis.

6. Get preapproved for a mortgage

Looking for homes is fun. Getting a mortgage loan is not. But before you start searching for new homes, make sure to get preapproved for a mortgage.

To do this, you'll meet with a mortgage lender. This lender will run your credit. You'll also have to provide this lender with copies of your last two months of paycheck stubs, last two years of W2 forms, last two years of income tax returns, and last two months of bank account statements. Lenders will study these forms to determine how much of a monthly loan payment you can afford.

Once it analyzes your financials, your lender will provide you with a preapproval letter stating how much of a loan it is willing to give you. You won't have to waste your time searching for homes that are outside this limit. You'll also be a more attractive buyer. Sellers prefer working with buyers who already have qualified for mortgages. Deals with such buyers are less likely to fall apart because of mortgage issues.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Questions to Ask Before Getting a Credit Increase

Dan Rafter — Wed, 15 Mar 2017 10:00:11 +0000

Feeling penned in by the low credit limits on your credit card? You might be able to boost your credit limit to a higher amount. Often, all it takes is a single call to your card provider. The bigger question, though, is whether you're financially prepared for a higher limit.

Your credit card providers will always set a credit limit on your cards, the maximum amount you can borrow. If you have a short credit history or a low FICO credit score, your credit limits might be low ones, sometimes under $1,000. If you have a long credit history and high scores, your limit might be $10,000, $20,000, or more.

How do know if you're ready for the financial responsibility of a higher credit limit? Here are some questions to ask yourself.

Do You Pay Your Credit Card Bill Late?

Do you pay your credit card bills by their due dates every single month? Or have you missed payments in the past? If it's the latter, you might want to hold off on requesting a higher credit limit.

Paying your credit cards 30 days or more late will cause your FICO score to drop by 100 points or more. Your credit card provider will also charge you a penalty, and your card's interest rate might soar. If you have a higher credit limit and a high balance, an interest rate spike could cost you quite a bit in extra interest payments.

Having a history of late payments will also give your credit card provider pause; the financial institution might not want to boost your limit if you don't always pay your bill on time.

Do You Carry a Balance on Your Card?

The smart way to use a credit card is to pay off your balance in full each month. This way, you boost your credit score by making on-time payments, and you won't get hit by the high interest that is often attached to credit card debt.

But what if you never pay your balance off in full? What if you roll your credit card debt over from month to month, watching it grow each 30 days as you do so?

If that describes you, don't worry about increasing your credit limit. Instead, focus on paying off your credit card debt in full. It's easy to let this debt get out of control because it tends to grow so quickly. You don't want to waste your money paying off interest each month.

If you think you need a higher credit limit to manage your bills, the better thing to do is to stop and assess your situation. A higher credit limit might save you for a few months, but you'll end up even worse off due to the high interest debt that you're accruing while your financial situation continues to spiral out of control. Make the tough cuts in your spending and create your debt payment plan.

Have You Maxed Out the Limits on Your Cards?

You never want to hit the maximum credit limit on your credit cards. If you've already done this on other credit cards, it's a sign that you need to get your spending under control, even if your credit card limits are relatively low ones.

Asking for more credit is not the right solution to maxing out your credit cards. The better move is to stop charging and start paying down those balances. Don't even think about asking for more credit until you pay off your credit card debt in full.

If instead you find you're bumping into your maximum even though you're able to pay it off each month (for example, you're trying to put your regular expenses on your card that you've been paying with cash or debit but there isn't enough credit available), that would be a good case for you to make in asking for a higher limit.

Do You Miss Other Bill Payments?

Are you constantly struggling to pay your auto, mortgage, or student loans on time? If so, you might consider higher credit limits to be a solution. After all, if you can charge more purchases each month, you might free up more cash to put toward those other bills.

This, though, is flawed thinking. If you're struggling to pay your monthly bills, you either don't make enough money, or you're spending too much. The better solution is to draft a realistic household budget showing how much money you're spending each month and how much you're earning. Armed with these numbers, you can then change your spending habits, make the move to a more affordable house or apartment, or search for a side job to bring in more income. (See also: 15 Ways to Make Money Outside Your Day Job)

Simply asking for more wiggle room on your credit cards is not addressing your money struggles. That's trying to avoid them.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Why the Age of Your Credit History Matters

Mikey Rox — Tue, 07 Mar 2017 10:01:04 +0000

A healthy credit score shouldn't be underestimated.

This three-digit number plays a pivotal role in your financial life, including whether or not you'll qualify for auto loans, mortgages, or credit cards, and if so, what interest rates you'll pay. It can even affect your career, particularly if it's in the finance field: A brokerage firm isn't likely to hire a candidate they suspect isn't good with money. (See also: 15 Surprising Ways Bad Credit Can Hurt You)

Given how much weight your credit score carries, you should do everything within your power to maintain a high score. Yet, before you can maintain a good score, you have to understand the components that make up your credit score.

What Makes Up Your Credit Score

Credit scores aren't determined by a single factor, but rather multiple factors. Once you open a credit account, your creditors report account activity to the credit bureaus on a regular basis. The bureaus compile data related to your accounts, and based on reported information, the bureaus formulate a credit score.

It probably comes as no surprise that your payment history and the amounts you owe have a tremendous impact on your personal score. Your payment history makes up 35% of your score, while the amount you owe makes up 30% of your score. If you pay your bills on time, avoid delinquencies, and keep your balances within a reasonable range, you'll eventually build up to a solid score.

But even when you take these measures, good credit doesn't happen overnight. Because there's another factor that contributes to your overall score: When credit bureaus formulate credit scores, they also take into account the age of your credit history.

The age or length of your credit history — which makes up 15% of your credit score — doesn't have as big an impact on your score as your payment history and amounts owed. Still, you shouldn't downplay the importance of credit age.

How Credit Age Relates to Credit Risk

Most of us rely on credit for an auto loan, a house, and a credit card. Even so, being a creditor is risky business, and banks don't arbitrarily approve credit applications. They consider several factors before approving financing, such as your income and your credit score. Even if you have adequate income and pay your bills on time, the bank might reject your application if you don't meet the minimum credit score requirement for a loan. This can happen if you have a young credit history. (See also: How to Build Your Credit From Scratch)

The age of credit history affects overall scores because a longer history provides a better assessment of risk level. Credit age takes two elements into consideration: the age of your oldest account, and the average age of all your accounts. The longer accounts remain open, the more your credit matures. And as your credit matures, credit scoring models slowly add points to your score.

To illustrate, if you've had a credit history for the past six years with no negative activity appearing on your credit report, credit bureaus evaluate your entire borrowing pattern, and based on your history and record, deem you a responsible borrower. This is a fairly accurate assessment given the length of credit history. As a responsible borrower, you're rewarded with additional credit score points.

But let's say you've only had a credit file for six months or a year. Given your short credit history, credit bureaus can't accurately rate creditworthiness. Despite paying your bills on time, you don't have a long borrowing track record. There just isn't enough evidence to gauge how well you manage credit — this happens with time. You have a short credit history, and unfortunately, your credit score pays the price. The good news, however, is that this is a temporary problem.

What Can You Do?

Credit scores range from 300 to 850. If you're aiming for a perfect credit score, understand that it takes years of responsible credit habits to achieve. It doesn't matter how well you manage your credit accounts in the first one or two years, you probably won't have as high of a credit score as someone who's had A+ credit for eight or nine years — but you can get there.

Remember, your payment history and the amount you owe make up 35% and 30% of your credit score, respectively. So while your credit score might be low due to a short credit history today, keeping your credit card balances low and making timely monthly payments will gradually increase your score. (See also: How to Use Credit Cards to Improve Your Credit Score)

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: