Want to Buy a House? First Do This One Year in Advance

Know Your Credit Score Before Buying a HouseMany people get excited when they get to the point in their life where they decide they want to buy a house! We were the exact same way on both houses! However, we weren’t smart enough to plan a year out in advance and, in retrospect, that could have really bitten us in the butt if a two specific things weren’t in the optimal ranges. What were those things and how can you make sure you have them in order? Follow along to find out!

How to Save Thousands of Dollars on Your House

There is an easy way to save thousands of dollars on your house and it doesn’t even involve negotiating with anyone! What is the simple trick? This first trick will help you lower your interest rate to the best possible rate. Did you know that as little as 0.5% difference in interest rate, for example 4.0% vs 4.5%, on a $200,000 mortgage can result in $21,000 difference in payments over the life of the loan.

Checking and Managing Your Credit

Having a credit score of above 720 will normally qualify you for the best interest rates available on mortgages. If your score is currently below 720 or is close to 720 then you have some major work to do over the next year. Even if you have a great credit score there are a few things you should make sure to manage to ensure you keep your score in the 720+ range to save thousands.

The first key is pulling your free annual credit report. If you don’t know how, check out my guide to pulling your free annual credit report. This report will not have your credit score but it will contain all of the information that your credit score is calculated from. Make sure everything is correct. If there is anything that isn’t accurate you should dispute it, especially if it is a negative item. After that you’re ready to start looking at your credit score.

Credit Scores

Hopefully Your Credit Scores are Much Higher Than This Person’s…

If you don’t understand the components of your credit score, make sure to read my post to learn more. You can’t change the past, but you can change the future to have the best rate possible when you apply for your mortgage.

Make sure you don’t make a single late payment from now on to keep the largest portion of your credit score high. If you have incurred late payments in the past, make sure you set up a system so that they don’t occur any more. Be proactive as you can!

Next, try to lower credit utilization ratio (the amount of debt compared to your credit limit) to 10% or less if at all possible. Lower is better and 0% is best! In order to get the lowest possible balance on your credit cards make sure to pay down to a zero balance before your statement date, as that is when most credit card companies report your balance to the credit bureaus. Between these first 2 categories you’ve already accounted for 2/3rds of your credit score!

Don’t close any old accounts to keep your credit history length and average account age as long as possible. The only exception is if there is a card with a large annual fee that is prohibitively expensive.

Finally, don’t apply for any new credit or apply for anything that will result in a credit inquiry. This last tip is the easiest 10% of your credit score to keep high. No inquiries = more points!

Unfortunately, at this point you really can’t do much about your credit mix, the last category of your credit score. You don’t want to apply for any new loans to balance out the mix but you could potentially close some newer credit cards if you have too many. Remember, you don’t want to affect the length of your credit history or make the average age of credit shorter!

To get an idea on how you perform in these categories, and to get an approximation of your credit score (not your actual FICO score) make sure to check out my Credit Sesame review! Credit Sesame will give you a grade for each credit score category and give you ways to improve each category.

Credit Sesame will also give you an approximate credit score, but make sure you realize that the score they provide isn’t your FICO score which your lender may use to determine your mortgage interest rate. The credit scores do tend to use the same factors to determine scores, but they can come up with different results.

Now that you know some tips and tricks to get or keep your credit score above the magic 720 number you’re on your way to savings thousands on your next house purchase! Putting a little bit of effort into managing your credit can make a huge difference. It is amazing how much a 0.5% difference in your interest rate makes in your total payments on your mortgage.

Not checking our credit scores a year in advance of  applying for our mortgage almost messed us up. We did check them as soon as we figured out we were serious at looking into buying a house, but at that point my fiancee’s score was in the borderline 720 range and we only had 30 days to apply for a mortgage.

Unfortunately, credit scores don’t update immediately so we were sweating bullets to see if her score would be above 720! We made a couple of quick adjustments, such as paying off her credit card before her statement date, and luckily we squeaked her into 720+ just in time! Phew!

However, there is another key factor your should be planning at least a year in advance of your house purchase. To find out what the second key factor is, make sure you check back on Friday for the second tip!

Did you manage your credit score before you applied for your mortgage and bought a house or were you flying blind? Did if affect your interest rate? Let me know in the comments!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. eemusings says:

    Well, saving up for a deposit in my area will take YEARS, so I’m pretty sure we’ll have more than enough time to take care of all this stuff 🙂

  2. Good tip Lance! Getting your credit in line before getting a loan can be a huge money saver over the long run. We have been lucky/worked hard to keep good credit, and we’ve been able to take advantage of it thus far.

  3. I’m pretty sure we didn’t do this since we only had 4 months notice before moving to our new city. But, my husband has excellent credit and is always conscious of maintaining it so we were lucky! The unlucky part is that I have NO credit history so we just left my name off the mortgage. But don’t worry, I’m working on building my credit history as we speak!

    • Good to hear that you’re working on your credit. That’s a step in the right direction if you want to take out loans in the future and to help lower some costs that are based off of credit scores like insurance.

  4. Great tip Lance & one that many overlook! We had worked on ours some before we got our mortgage, though not much as both of our scores were already pretty high. We just made sure we did not do anything stupid to impact our score.

  5. A little preparation and planning can save you a considerable amount of money. I think it is true of all major purchases. Saving for replacements saves you the interest. When I went to buy a car I had my loan and I knew how much the car would cost.

  6. Great tip! I have friends that are starting to buy houses and have poor or no credit and it is causing a lot of headaches for them. Fortunately my financial progress so far has lead to an excellent credit score. As long as I can maintain that down the road, I should be prepared. Looking forward to reading about the second tip!

  7. All of these things are great tips and definitely things that most don’t do. It’s crazy that just half a percentage can save that much, but it makes sense if you think about it. Great post.

  8. I didn’t do any adverse thing to affect my score in last one year. I am also Credit sesame user and very satisfied with my score. I think with mortgage low now, I can think about looking for a home

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