When it comes to buying a home, you'll quickly learn that there are many factors involved in the approval process.
The most important one? Your credit score.
That's why understanding what goes into your score is one of the first steps in purchasing a home. Every consumer has three FICO scores, one for each credit report provided by the three major credit bureaus (Equifax, Experian and TransUnion). Here are the five factors that make up this score:
- Payment history: Your account payment history, including negative marks like delinquencies or collections. Lenders want to know you pay your bills on time.
- Total amount owed: Your current debt, the sum of how much you owe on your accounts compared to the amount of credit available to you. A low debt-to-available-credit ratio is ideal.
- Length of credit history: When you first opened your accounts and how long it's been since you used them factors in here. The longer your history of positive credit behavior, the more trustworthy you appear to lenders.
- Mix of credit: This is the various types of accounts you hold, such as installment or revolving. Lenders like to see that you can responsibly maintain a variety of types of accounts.
- New credit: Credit inquiries and other examples that you're continuing to pursue new credit make up a portion of your score. It's a good idea to keep this number low to show you're not seeking credit from multiple sources.
Now that you understand the components of your score, you might feel the need to rush to close accounts that have been paid off that you no longer use.
However, before you begin to close accounts, stop to consider that those paid-off accounts actually contribute to favorable credit history and looks good to lenders. As mentioned above, these accounts show that you've demonstrated the ability to make consistent payments and that you can responsibly maintain a mixture of types of accounts.
If you have a less-than-stellar credit history and think a home purchase is out of the question, don't rule out a home loan yet! There are solutions for almost every situation and our team would love to start a conversation with you about your financial and home-buying goals. Don't hesitate to reach out to our team. We're always here to help.