You must have heard financial specialists say: check your credit score and reports before you buy a house. But do you know why it’s important? Let’s begin by defining some vital terminology.
Most people don’t understand the difference between credit reports and credit scores. They use these terms alternately, but they’re two different things:
A credit report contains your past financial activity. It’s a report with details about your previous accounts and the accounts you have presently. The accounts include things like student loans, personal loans, credit cards, mortgages, and more.
Also, the reports contain pejorative or negative details relating to the accounts. It includes debt collections, bankruptcy filings, foreclosures, and late payments to say the least.
Your credit score is a 3-digit figure based on the information (compiled within your credit reports. The details are run via a computerized algorithm, which changes it into a score.
Why your credit is important when buying a home
If you’re buying a house with cash, you don’t need your credit score. Also, you don’t need to get 3rd-party financing. You don’t need to apply for a loan since you have the money already. What this means is, your credit situation is not an issue.
But if you lack the funds to buy a home outright, you need a mortgage loan to help along. In a normal home-buying situation, the lender is responsible for covering the cost — not you. So the lender bears all the risks. This is where credit scores and credit reports come into play. In essence, credit scores and reports can either break or make your chances of receiving a loan.
Your credit score helps lenders weigh the risks you bring as a debtor. Instead of flipping through your credit report for information, lenders can just check your credit score.
If you have a high score, it indicates that you’ve repaid what you took as a loan and the money you owe in the past. With a high score, you stand a chance of getting approved for financing. In general, it gets you the finance you need to buy a home.
A low score shows that you’ve had credit issues before. It includes failing to repay a debt completely and not paying your bills when it’s due.
Clearly, these are huge concerns for financiers who want to give you a house loan.
Your credit score is gotten from your credit reports and the information within. So it’s crucial to check this information and make sure it’s accurate. Further, you can get all 3 reports by visiting Click Free Score.
How to improve your credit score
If you’re not happy with your credit score, don’t feel discouraged. You can increase the score after a while. To improve the score, try decreasing your credit card balances. Also, make certain that you pay all pending debts and pay your bills timely.
If you pay off your previous accounts and keep your new account in good standing, it will help increase your credit score.
It may take a while to have a substantial positive effect on your credit score. But with good credit conducts, you can increase your score. Also, increasing your score will help make you qualify for a house loan.