If you’re thinking about buying a home, statistics say one of the first things you’ll do is surf the Internet. At first you’ll look at homes for sale or learn about the process. Then you’ll at a real estate agents – it’s a lot of information.
Be forewarned – not everything you read is accurate. For instance, some real estate agents recommend your first step to buying a home is to hire a real estate agent.
While it’s important you go into the current alongside an expert, the first and most important step doesn’t include hiring an expert.
Homebuyers needing a loan should speak with a lender before hiring an agent. Do this well in advance and before looking at homes for sale. This is a good start, but even that isn’t the first step in buying a home.
The First Step In Buying A Home Is…
It’s easy to feel overwhelmed buying a home as all you want to do is skip over the boring steps to get to the fun stuff: looking at homes.
Especially considering that the beginning of the home buying process has to do with finances.
If your dream is to buy a gorgeous home, in a decent area, with a comfortable mortgage payment… step one is to raise your credit score.
Raising Your Credit Score A Smidge Will Make A Huge Difference
The Fair Isaac Corporation, commonly known as FICO, is an analytics company who takes all of your credit information and scores from the three credit reporting agencies and calculates a FICO® score.
These scores can range from 300 to 850. A “good” credit score is between 670 and 739.
Yes, some borrowers obtain an FHA-backed mortgage with lower scores and a lower down payment, but they pay more for the home in the end.
Plus, what many first-time homebuyers may not realize is that the FHA loan guarantee comes from a lender who will charge higher interest rates because of a low FICO score.
Those rates result in a higher monthly home payment. That’s because of the small down payment and FHA’s mandatory mortgage insurance premium that comes with it.
Boosting your score can mean big savings on your monthly mortgage payment. This is a massive benefit when buying a home as you can see below.
Here’s a scenario using a base rate we determined randomly (current rates are far lower). A borrower with a credit score of 700 to 759 might be offered an interest rate of 3.75% on a 30-year fixed rate loan. The borrower with a 620 to 639 score, on the other hand, would be offered a rate of 5.09%.
If you’re the low scorer in the above scenario you’ll pay $187 more a month on your mortgage payment than the high scorer. You will also pay $67,181 more in interest over the life of the loan.
If you were to raise your score to 640 you would end up saving more than $38,700. Raise it even higher, to 660, and you’ll save $42,000. Finally, if you can get that score up to 700 you will save more than $58,000.
As you can see, patience and a bit of hard work before you purchase a home pays off.
How To Boost Your Score Fast
At the very least, pay down your bills as much as you can. Don’t apply for new credit and make sure all your payment are paid on time.
In fact, the folks at FICO caution borrowers to cease the use of their credit cards completely and pay down what is owed on them.
Start paying off other debt that appears on your credit reports one-by-one. Hack away at them and before you know it your balances will be lower or gone. Your credit score will reflect the new, more financially responsible you. And when buying a home, there is nothing more valuable than having good – or great – credit.
Now you’re ready for step 2 when you’re buying a home – so strut into that lender’s office and ask the representative to pull your credit score.
Do yourself a favor: resist temptations of looking for homes online without doing this homework. You may think you can afford a more expensive home than you can. That’s a bad trap to find yourself in. Buying a home is an emotional moment in life. So it’s better to enter this event knowing what you can afford, then being deflated when you’re not prepared.
Work on your credit score now. Don’t wait. It will make buying a home a more enjoyable process than you thought.
