5 Things New Homeowners Need to Know About Credit Health
As a first-time homebuyer, you’ll likely soon find there’s a lot to manage — like mortgage contracts, down payments, home inspections, offers and counter-offers. Or, perhaps you never planned to own a home in the first place, but recently inherited property from a family member or spouse.
No matter how you ended up here, one of the most important factors in your new home journey is your credit health. Having a good credit score not only makes it more likely that you’ll be approved for your first mortgage, but it can reduce your interest rate and lead to other financial opportunities down the line. Improving your credit health may be a long-term process, so the sooner you get started, the better.
Review Your Credit Reports
According a study published by the FTC, roughly 20% of people have an error on one or more of their credit reports.1 Whether you’re looking for a home or are a recent homeowner, accurate credit reporting is essential.
If You Want to Buy a Home…
Credit reporting errors can hurt your chances of getting approved for a mortgage with favorable rates. Check your free credit reports from the major credit bureaus, and review them carefully for any inaccuracies — ideally as much as a year before you plan to apply for a mortgage. Good credit is still important for homeowners who recently inherited property, as a higher score can help secure low rates with any remaining home mortgage, pursuant to state and federal regulations.
If You Just Bought a Home…
Credit reporting errors can lead to bigger financial issues down the road, whether you plan to refinance, open a new credit line or utilize home equity in the future. The higher your credit score is, the more opportunities you’ll have available to you. Regardless of your future plans, it’s important to review your credit reports for accuracy on a regular basis.
Reduce Your Debt Balances
Credit utilization has a big impact on credit scores. Ideally, you shouldn’t use more than 30% of your available credit on revolving accounts, but even reducing it to 50% can help raise your score.
If You Want to Buy a Home…
A home mortgage is a substantial responsibility, so it’s best to reduce or eliminate any outstanding balance as much as possible before taking on another sizable debt. A low credit utilization ratio can help improve your mortgage eligibility, resulting in potentially lower mortgage rates.
If You Just Bought a Home…
If possible, try to keep a low credit utilization ratio in order to keep your budget and credit score in check. Avoid the temptation to move debt from one credit account to another. Not only might you pay extra fees, but doing so won’t reduce the debt utilization ratio used to calculate your credit score. While revolving credit, such as a line of credit, are helpful for unexpected home repairs, refrain from using credit for large purchases and/or everyday expenses until you can pay down your balance as much as possible.
Pay More Than the Minimums
Paying just the minimum amount due on credit accounts can keep you in debt longer and make it harder to eliminate them in the future.
If You Want to Buy a Home…
Work towards eliminating your balance in full rather than making the minimum monthly payments. Doing so at the end of each month may make you more attractive to mortgage lenders and help reduce the amount of interest for your agreement, if approved.
If You Just Bought a Home…
Whenever possible, pay more than the minimum monthly payment on all of your credit accounts. While you might not be able to eliminate credit balance(s) completely, paying more than the minimum due can help you save money on interest over time, and help you eliminate debt faster.
Plan for Extra Home-Related Expenses
Mortgage payments (and many times, other costs like association fees) will likely represent a significant portion of a new homeowner’s expenses, but usually these aren’t the only home-related incidentals in a typical month. Your dream house may seem like the perfect fit, but will require repairs, updates and/or maintenance down the line, all of which can be very significant expenses on top of other financial responsibilities. In order to account for repairs and upkeep, experts recommend saving roughly 1 — 2% of the home’s value per year just for home maintenance alone.2
If You Want to Buy a Home…
When shopping for a home, keep in mind the total cost of the home, in addition to the recommended repair and maintenance costs, or roughly 1 — 2% of its value per year. Make sure you can reasonably account for incidental expenses in your new monthly budget for as long as you plan to own the home.
If You Just Bought a Home…
If possible, aim to reduce your monthly expenses and increase your savings rate to account for home repairs and maintenance. For unplanned expenses, a revolving line of credit or credit card are two options to help manage emergency home expenses if your account is low.
Consider How New Credit Affects Your Score
Everyone has a limit on the amount of money they can safely borrow at any time, which is based on factors like your income, assets and amount you currently owe.
If You Want to Buy a Home…
If homeownership is on the horizon, you may also want to reconsider making changes to your credit report prior to taking out a mortgage, if possible. Taking on new debts and/or closing accounts can affect your chances of getting approved for a mortgage with an acceptable interest rate. For example, if you bought a new car on credit, you may find you’re no longer eligible for the mortgage you planned on, until you’ve paid back some of that car loan. If you are approved for that mortgage, you may find the interest rates are higher than you expected.
Aim to keep your total credit balance low, but don’t close revolving accounts soon before applying for a mortgage. Mortgage lenders don’t like to see drastic recent changes on your credit report, including new loans or recently closed accounts.
If You Just Bought a Home…
You may want to avoid taking on new credit or closing existing credit lines as a new homeowner, as more debt can negatively affect your ability to repay them. Recent credit changes as well as a higher credit utilization ratio can lead to a lower credit score. Even though you may already have a mortgage, it’s still important to maintain credit health, as a good score can help you secure lower rates and more favorable financial opportunities in the future.
References
1Fiano, L. (2019). Common errors people find on their credit report – and how to get them fixed.
2Dellitt, J. (2018). Why You Need To Adjust Your Monthly Budget For Home Maintenance.
The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.
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