Managing Your Credit Score
When you’re ready to take the leap into home ownership, one of your first stops should be checking your credit score. Your credit score (or FICO score) is determined by your history of paying bills, the amount of debt you carry, and your credit history. Three national credit bureaus maintain credit reports in the United States—Equifax, Experian, and TransUnion. FICO takes your score from each credit bureau and provides a summary that will tell lenders how risky it is to loan you money. If you have a history of paying all your bills on time, then lenders will be reassured that you’ll be able to pay back their loan.
You’re entitled to one free credit report a year, which you can check at annualcreditreport.com These reports aren’t always error-free, so it’s a good habit to check them once a year to make sure there aren’t any mistakes. If you find a mistake, you can dispute it with the credit bureaus. If you’re planning to buy a house soon, you should check for errors early in the process so there’s time to fix any mistakes on your report.
Scores range from the lowest, 300, to the highest, 850. Typically a score above 740 is “very good” and you’re on the right track for buying a house. If your credit score is in the “low” range, 580 and below, you should start making financial changes to improve your score before trying to buy a house. The largest thing you can do is make sure all your accounts and bills are in good standing and paid every month. Make sure you’re paying your utility bills on time—late or missed payments or delinquent accounts will hurt your score. Outstanding medical bills that aren’t being paid can also decrease your score.
If you haven’t already, establish a few lines of credit—these can be car loans, student loans, credit cards, etc. But be careful—don’t apply for credit you don’t really want or won’t use. A cashier might offer you 10% off a purchase at a retailer to apply for their store credit card, but that application runs a check on your credit and too many checks can hurt your score. If you won’t frequently use a store credit card, it’s best to avoid them—credit cards should be used routinely since inactive accounts lower your score. Opening and closing lines of credit frequently can also hurt your score.
Managing your credit cards can be a delicate balance—you want to use them frequently, but not too much. If possible, you want to pay off your balances in full every month. However, emergencies and unexpected purchases do happen, as most of us know too well! If you carry a balance on your cards, aim to keep it under 30% of your total credit limit—this will help you keep the best credit score you can. Try to make more than the minimum payment each month, which will save you money in interest payments down the road.
What Is My Budget?
Before you start checking out house listings, you should figure out how much house you can comfortably afford. A standard rule of thumb is that your house payment shouldn’t be higher than 28% of your income. Keep in mind that your house payment will include insurance, taxes, interest, etc., and that you should have some budget set aside for potential repairs or upgrades and other ongoing expenses like property taxes.
In addition to your down payment, you’ll also want to factor in closing costs and other fees when doing your budget. Average closing costs are 2–5% of the purchase price of the home. For a $100,000 home, closing could be between $2,000 and $5,000. However, in-house New Era Bank loans offer significantly cheaper closing costs. A traditional home loan cannot include your closing costs, so make sure you’re budgeting around that expense (closing costs can be financed under USDA loans). You can get an estimate on your closing costs ahead of time so you’ll be able to prepare accordingly. Just ask your New Era Bank mortgage officer. Other fees you might encounter include origination fees, inspection fees, and appraisal fees.
When making an offer on a house, it can be beneficial to have “earnest money” (or a “good faith” deposit) ready that you can put forward to show a seller that you’re serious about buying. If you happen to be in a bidding war with other buyers on the house, earnest money can also be a factor in a seller deciding to accept your offer. At the end of the process, this earnest money will go towards your closing costs or down payment. Earnest money depends on the real estate market, but around 1% of the cost of the home is a good estimate.
Once you’ve got your income and expenses calculated, you can use our loan calculator to help determine your house budget.
Up-front costs checklist
- Down payment
- Closing costs
- Earnest money
- Application fees
- Inspection fees
Saving For a Down Payment
A down payment is a percentage of the total cost of a home that you pay up front. A traditional home loan requires 20% as a down payment. Generally, the higher your down payment, the lower your total loan amount will be, leading to lower monthly payments and possibly interest rates. Since down payments are percentage based, you might want to decide what price range of home you’d like to buy first so you can save accordingly.
Another tip for saving is to use a dedicated savings account for your down payment. You can learn more about savings accounts here.
If a 20% down payment isn’t doable for you, we can still help you get into a house. Some home loans require less than 20% down, which you can read more about here.
Prequalification is an assessment early on in the home-buying process that gives you an idea if you’re in a good financial position to buy a house and an estimate of how much you might be able to borrow. Prequalification is not a commitment from a lender or a guarantee—just a starting point for your house hunting process. Keep in mind that you might qualify for a higher amount than you can comfortably afford—you’ll want to have money left over for things like furniture or updates to your new home.
The prequalification process doesn’t factor in your credit history, but mortgage pre-approval and an official mortgage application will. If you’re concerned about your credit score, be sure to discuss it with your loan officer so they can help you find the right loan option.
Prequalification Documents Checklist
- Names of all buyers
- Current address
- Estimated annual household income
- Estimated monthly household debt