If you’re a Millennial and are thinking about buying a home in the near future, you’re not alone. Credit bureau TransUnion estimates there will be between 2.8 and 3.4 million first-time home buyers per year over the next five years, the majority of which will be between the ages of 20 and 39.
In coming up with those estimates, TransUnion factored in the credit worthiness of prospective homebuyers. However, there are others in that age range that would like to buy a home soon as well but are concerned about their qualifications. In a separate study, TransUnion found that many prospective home-buying Millennials are worried about:
- Having a credit score that’s too low
- Not being able to come up with a down payment
- Not qualifying for a low interest rate
Let’s take a closer look at credit scores since that’s an especially important factor in qualifying for a loan and receiving the best rate.
When buying a home, credit scores matter—a lot. They range from 300 to 850, and unlike your cholesterol number, the higher the better. The higher your score, the more likely you are to qualify for a mortgage and the lower your interest rate will be.
You can get an estimate as to how your credit score may impact your interest rate via this calculator from Fair Isaac Corporation, inventor of the credit score.
While there are many sources of free credit scores today, all scores are not developed the same way, nor are they necessarily the ones a lender will use when evaluating your mortgage application. To get the best read on your score, buy it from Fair Isaac for $19.95. You’ll have the choice of purchasing scores from all three of the credit bureaus, but one should give you a sufficient feel for whether your score is in good shape or not.
Of the five factors that impact your score, paying your bills on time and how much you owe are the most important.
Of course, lenders like to see a history of timely bill payments. As for how much you owe, lenders use a ratio known as your “credit utilization,” which is simply the percentage of credit you have available to you that you’re currently using. Using less than 30% of your available credit is good; using less than 10% is ideal.
Before applying for a mortgage, you can see how you’re doing on both of these fronts by obtaining your free credit reports from all three bureaus via annualcreditreport.com.
Near the top of your Equifax report, you’ll find your credit utilization listed as “Debt to Credit Ratio.” If yours is high, focusing on paying down your debts and using your credit cards for fewer purchases will be the fastest route to improving your credit score.
Next, check to see if there are any late payments noted. For Experian, you want your open account status listed as “Open/Never Late.” For Equifax, “Pays as Agreed.” For Transunion, “Paid or Paying as Agreed.” If any accounts are listed otherwise and you believe you have never been late with a payment, contact the creditor, let them know you believe a mistake has been made, and ask if they will change it on your credit file.
A little knowledge can go a long way toward helping you achieve your dream of home ownership. Buying your credit score and reviewing your credit reports are some good places to start.
Matt Bell is the author of four biblical money management books published by NavPress. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.