3 credit secrets that will help you qualify for your dream home
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For thousands of Americans across the country, a common New Year’s resolution included buying a home. For some this goal may easily be within reach, for others it may seem more like a dream. But is it?
Whether we are in a buyer’s or seller’s market, interest rates are expected to rise in the near future. Armed with this information, you can decide whether it’s better to pay a little more than the asking price now or pay a higher interest rate over time (keeping in mind that you can always refinance at the future to get a lower rate if this option works better).
Related: Are You Considering Buying a Home? Read this first.
In the meantime, there are some underreported credit moves that will help you qualify for a loan and make that New Year’s resolution a reality, no matter how much money you have in the bank.
1. Avoid credit errors
Common missteps made when consumers are about to buy a home are paying off accounts in full, closing or using credit cards recklessly, and opening new accounts.
It may seem logical to think that paying off an account in full is always a good thing; the truth is, sometimes it does, and sometimes it doesn’t. When you pay off an installment account in full, it closes, which hurts your credit score because the age of that account is no longer reflected on your credit profile. Also keep in mind that a closed account is worth less than an open account. So, when buying a house, the secret is to pay off a large majority of the installment loan while leaving it open. In most cases, a 90/10 ratio is fine (provided it’s within your budget), which means 90% of the account is paid off, with 10% of the open balance. This lowers your debt ratio and will increase your credit score.
Since we now know that closing accounts is a bad idea, we want to do the same with credit cards; pay them as low as possible, but leave them open (you can also use the same 90/10 ratio for these). Also, if you have monthly bills or subscriptions tied to your credit cards, it might be a good idea to disconnect them until you’ve completed the escrow. This way, there won’t be any balance on cards you may have forgotten. (If this balance is reported, it will hurt your debt-to-income ratio.)
Related: 3 credit secrets that millionaires use as leverage
2. Use other/additional credit
If you live with your spouse or a family member (i.e. brother, sister, son, cousin) over the age of 18, you can use their credit profile under a legal tenancy in common (TIC) arrangement, in which each tenant owns a certain percentage of the property. The advantage is that if all tenants are employed, each of their incomes (as well as credit scores) can be included in a loan application. The downside is that the lender will normally go for the lowest credit profile of all tenants, but there is a workaround to this, which leads to our next and final credit secret.
Adding an authorized user (a parent, friend, or family member) to a credit card, aka “piggyback,” can be a reliable way to boost a credit score. For example, when a mother adds her daughter to a card, that credit history (including card age and credit limit) will appear on the daughter’s credit report. The secret is to get a card with sufficient age as well as one with a high credit limit. It is also essential that there are no missed payments associated with the card and that it is reimbursed at less than 10% of total use (the lower the better).
An Authorized User account will normally appear on a credit profile five to 10 days after the statement date associated with the credit card, so that is when the credit report increase will be visible.
Related: This new credit card can help you buy a house. But creating it was almost impossible.
In the illustration used above, consumers with high credit ratings can each add the third consumer with low credit rating to their credit cards, which will ultimately increase the rating. (The more cards you do this with, the better!) This will definitely improve the odds of a favorable outcome in pursuing a home purchase.
Keep in mind that once a mortgage reports to your credit report, it moves your credit to a higher credit class because the algorithm of having a good profile includes having a mortgage loan. Plus, lenders can now see that you have a stable residence and are aware that the vast majority of homeowners get escrow in their home, making the consumer more attractive to lenders – a win-win situation.