The One Important Thing You Should Consider Before Buying a House

Renting is convenient in your early years, as you’re just getting a job and getting your life in order, perhaps even moving around for jobs, relationships and adventure.

But as you get older, you may start thinking about buying a house, whether because you’re partnered with someone or you are in a long-term career and want to settle down somewhere. After all, when you rent, your money is spent on a temporary place to live; but when you own a house, your money is spent on paying down the mortgage of a permanent asset that you own.

The Homebuying Process

Buying a house is a lot of work — you need to figure out what you want in a house, get pre-approved for a mortgage, find a real estate agent who can help you, go house-hunting and ultimately make an offer. And the work doesn’t stop there. Most people who have bought houses say that the real work begins once your offer is accepted and you move into your home.

Maybe you’re not in the homebuying process yet; maybe you’re still dreaming of what you want in a house, or which neighborhood or city you’d like to live in. Maybe you’re simply visualizing your future kids playing in the backyard or having the neighbors over for a barbecue on a warm summer evening.

No matter what stage you’re at, even if buying a house isn’t something you’re actively working on at the moment, you can take action today to help prepare by doing one simple thing: having a good credit score.

Work on Credit Now, Benefit Later

When you go to a bank to get pre-approved for a mortgage, the bank will check your credit and use that to help decide if they’ll lend you money and, if they do, what your interest rate will be. If you’re approved, the bank will likely give you a preliminary loan amount number that you can use to help you start your house-hunting. When you make an offer on a home, you’ll go back to the bank and, as long as your credit is still in good shape, you should be able to get that pre-approved mortgage.

In other words, your future homeownership really hinges on your credit. Therefore, if you plan to buy a house in the future (even if it’s a couple of years away in your mind’s timeline), you are already taking action today on that house purchase.

When you use your credit card, when you pay your credit card off, when you borrow money for a car loan, when you decide to apply for another credit card, when you lend your credit card to a friend — everything you do that impacts your credit is ultimately impacting your eventual homeownership, from how much money you’ll get for your mortgage to how much interest you’ll pay.

So if homeownership is a dream that you hope will turn into a reality someday, consider the decisions you’re making now and how they’ll influence your homeownership. To get started, you can see two of your credit scores for free on Credit.com. These scores are updated each month, so you can see where you stand now and what you need to do to get to where you want to be before heading to the bank to talk about mortgages.

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What Credit Score Do I Need to Buy a Home?

homebuying in 2016

Buying a home may no longer be the American Dream (now people just want to get out of debt someday), but it’s still a huge goal for many. But if you don’t have a good credit score, that dream might go up in flames.

A lot of things factor into getting a mortgage, but it starts with your credit score. If your credit score isn’t good enough, nothing else matters. Depending on the loan program, lender and an applicant’s specific credit history, the minimum credit score necessary to buy a home varies. Heather McRae, a senior loan officer for Chicago Financial Services, said 580 is the lowest score she’s seen in recent loan approvals, and she hasn’t seen anything lower than that in a long time.

A 580 is a bad credit score (on the often-used scale of 300 to 850). A 600 credit score isn’t the best credit score, either, but that’s generally considered the minimum for an FHA-backed loan, said Scott Sheldon, a senior loan officer at Sonoma County Mortgages. FHA loans are popular among first-time homebuyers and have a minimum down payment of 3.5%. If you’re going for a conventional loan (one not backed by a government agency), the minimum credit score is 620, McRae and Sheldon said.

Those minimum scores are just that — they get your foot in the door. But mortgages are complicated and require a lot of paperwork, so if you’re barely squeaking in, you can expect a rough ride. Take that 600-minimum on a 30-year fixed-rate FHA loan.

“You’re going to have a lot —  I mean, a lot — of hoops to jump through,” Sheldon said. “It’s going to be very unpleasant.”

For people with lower credit scores, a down payment plays a huge factor in approval. McRae said a 20% down payment and a 620 credit score should get you a loan, but a smaller down payment will tighten credit standards.

“680 is kind of like the unspoken minimum, but you can definitely get something done below that,” she said. “If you’re under a 680 credit score, the mortgage insurance premiums get pretty steep.” Loans with less than a 20% down payment require mortgage insurance, which you can sometimes get rid of later.

Sheldon also said 680 is the unofficial minimum.

“680 would be the goal, the credit score to strive for if you want to have choice and flexibility,” Sheldon said. If you’re already close to a 680, he said to aim higher for even better loan terms. “You really want your score in the 740 range to get optimal pricing on any given day.”

There are home loans for people with a variety of credit scores, but with a financial decision of this size, it helps to set yourself up for the most affordable terms possible. If you’re thinking of buying a home at any point in the future, start preparing for the mortgage process now by building a good credit score. It can take awhile, especially if you had credit problems in the past, but there are many ways to rebuild your credit and position yourself to buy a home someday.

As you work on improving your credit, you can see how you’re doing by looking at your two free credit scores every month on Credit.com. Make sure you’re looking at your free credit reports each year, too, at AnnualCreditReport.com, because sometimes errors can be dragging your score down — and you need to find them to fix them.

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