1. Check your credit
What to do now
Lenders generally use your credit scores and the information on your credit report to determine whether you qualify for a loan and what interest rate to offer you. Follow the steps below to check your credit:
- Get a free copy of your credit reports
- Check your reports carefully for errors and dispute them if necessary
- Get one or more of your credit scores
- Understand how credit scores work
What to know
Checking your own credit won’t hurt your credit scores
When you check your own credit reports or scores, the request is processed differently than when a lender checks your credit. Checking your own credit won’t hurt your scores.
The rate you are offered on a mortgage can vary quite a bit depending on your credit scores
Your credit scores are only one factor in a mortgage lender’s decision, but it is an important one.
While there are no firm rules about exactly how your credit scores affect the interest rates you may be offered for a home loan, in general:
- The lowest interest rates go to borrowers with credit scores in the mid- to high-700s or above. These borrowers typically also have the most choices available to them.
- Borrowers with credit scores in the 680-740 range typically pay somewhat higher rates.
- Borrowers with credit scores in the 620 to 680 range generally pay the highest rates and have the fewest choices. Borrowers in this range may have trouble qualifying for a loan, depending on the loan type and the specific lender. However, government programs such as those from FHA, VA, and USDA may be a good option for borrowers in this situation, especially those with smaller down payments.
- Borrowers with scores below 620 generally have trouble qualifying for a loan and may want to improve their credit before applying for a mortgage. If you need help improving your credit, contact a HUD-approved housing counseling agency.
Explore interest rates for different credit scores to get a sense of how much your credit scores matter.
Be wary of companies offering to “fix” your credit scores
You might see companies that promise to make quick improvements to your credit. Be especially wary if they charge an upfront fee – these companies are often scams. Never pay in advance.
A housing counselor can help you get your credit report and check for errors
A housing counselor can be a good resource throughout the home buying process and can help you figure out what your options are, especially if you don’t have a credit report or score. You can find a HUD-approved housing counseling agency online or by calling 1-800-569-4287
2. Assess your spending
Before you start home shopping, take a close look at your current spending. For most people, buying a new home means taking on new expenses — whether you are currently renting or already own a home. You need a clear understanding of how much you’re currently spending to decide what you can comfortably afford to spend on a new home.
What to do now
Take a realistic look at your current spending patterns
Review your credit card, debit card, and bank statements for the past several months and add up what you spend each month. Active duty servicemembers can also consult their installation’s personal finance manager for questions and help with this step.
- Tip: Don’t forget to include cash purchases by saving receipts.
- Tip: Consider a personal financial management tool or app that can help you track your spending. Your bank or credit union may also offer similar tools.
Create a monthly list that accurately reflects your current spending
Categorize your expenses for each month and put them into a budget tool .
- Tip: Look back over several months to make sure you don’t miss less frequent expenses like insurance payments, medical expenses, school clothes, tuition, support for family members, seasonal and recreational costs, gifts, charity, and vacations.
- Tip: Don’t edit your spending to reflect what you “could” or “should” be spending.
Add up all the categories and compare your monthly spending to your monthly take-home pay
How much is left over? How much are your currently spending on housing-related expenses?
If the amount you typically have left over in your bank account each month doesn’t match the amount your budget says should be left over, re-examine your spending patterns to see if you need to adjust the numbers in your budget.
