If you are interested in buying a home but aren’t sure where to start, you’re not alone. A recent Zillow survey showed that Americans know more about celebrity love lives, the NFL and the Kardashians than about real estate basics. To help you get started, we put together four steps to help you learn how to qualify for the best interest rate possible.
Step 1. Understand your credit profile
Credit scores are key to getting approved for a mortgage, but for many home shoppers, understanding credit is complex. When Zillow recently asked five questions about credit scores, the average American only answered two out of five correctly.
Lenders commonly use FICO® scores, which range from 300 to 850, to gauge creditworthiness. The higher your score, the more creditworthy most lenders will deem you to be. Borrowers actually have three FICO scores, one for each of the three credit bureaus: Experian, TransUnion and Equifax. Each score is based on information maintained by that credit bureau.
Your credit report is an annual report that informs your credit score and includes your credit history and a summary of open and closed accounts. This score may be higher than the score a mortgage lender will pull; this is because of scoring differences between general credit worthiness and the mortgage-specific factors a lender will consider. Consumers can access their report for free once per year and should review it for accurate information. Irregular activity you should watch for can include:
- Open accounts that you don’t know about. This could happen if you were a victim of identity theft.
- Accounts showing late payments that you don’t know about. This could happen if you were traveling and forgot to make a payment or your autopay wasn’t processed correctly.
- Accounts that have been sent to collections that you weren’t aware of. This could happen with something like a parking ticket that you never knew you received because it fell off your car before you saw it. Even if something like this happened, the ticket issuer would still send it to collections.
- Tax liens that you don’t know about. This could come from accidentally not paying all the taxes you owed because you or your tax preparer calculated your tax return incorrectly.
Monitoring your credit score and report regularly is an important early step for spotting issues that might impact your interest rate on a mortgage while also maximizing your credit score.
Step 2. Improve your credit score
Once you familiarize yourself with what’s in your credit report, there are ways you can improve your credit score:
- Pay down existing debts. Although paying off accounts in full may not translate into a higher credit score, paying the debt down to less than 30% of the limit can have more of a positive impact on your score.
- Pay bills on time and make sure payments go through.
- Review your credit report and dispute possible errors.
Taking these steps early will help improve your credit score before you get pre-approval from a mortgage lender.
Step 3. Avoid making major financial changes
While you’re working to improve your credit score, there are some things you should avoid doing, as they can hurt your score or impact a pre-approval on a loan.
- Don’t close an account to remove it from your report. (It doesn’t work.)
- Hold off on any large purchases that need to be financed, such as a car, before you close on a home. This type of purchase will impact your debt-to-income ratio, which will negatively impact the amount of home loan you qualify for.
- Wait to apply for a pre-approval until you are satisfied with your credit score. Lenders must pull your credit report every time you apply for credit or have your pre-approval updated, and too many applications (credit pulls) will negatively impact your score.
Step 4. Determine what affordability looks like for your financial situation
Once you have a good understanding of your credit report and are satisfied with your credit score, it’s time to understand how much home you can afford. Use Zillow’s affordability calculator to customize payment details.
When it comes to calculating affordability, your income, debts and down payment are primary factors. Contact Zillow Home Loans to learn more about mortgage options for your personal financial situation.