A Better Credit Score Means Easier Home Buying

Home buying and credit scores go together like peas and carrots, to borrow from the philosophical Forest Gump. In this article, we will explain the importance of maintaining good credit when buying a home and applying for a mortgage loan.

For most of us, buying a home means applying for a mortgage loan to cover the cost of the home (or most of the cost). This is where credit enters the picture. If, like most people, you need to obtain a mortgage loan to pay for a home, then you will need a credit history behind you.

Mortgage lenders will review your credit reports (you have more than one) and your credit score in order to determine your level of risk. Lenders refer to this as creditworthiness. If you have a good credit score and a history of paying bills on time, your creditworthiness is high and you'll have an easier time qualifying for a loan.

But we are getting ahead of ourselves. Let's cover some of the basic terminology being used here:

Credit Report -- These reports are maintained on all tax-paying citizens in this country. They include your history of bill payment, credit card balances, loans you have obtained in the past, and other bits of financial data. You actually have three credit reports, one for each of the credit-reporting bureaus (Experian, TransUnion and Equifax).

Credit Score -- The information contained within your credit reports is used to determine your credit score. This score will range from 300 to 850, and higher is better. A higher credit score tells lenders that you are financially responsible. A lower score raises some red flags, perhaps because of financial problems in the past.

FICO Score -- This term is basically interchangeable with credit score. FICO stands for Fair Isaac Corporation, the company who created the FICO scoring model that is used to convert your credit reports into scores. Thus, you will often hear the term "FICO credit score" used as well.

So to sum up our terminology lesson, your financial history leads to your credit reports. Those reports are then converted into a credit score. Mortgage lenders will use your credit score to determine your creditworthiness -- which will determine whether or not they approve your for a loan, and also the interest rate you get on the loan.

Obtaining Your Reports and Scores

If you plan to buy a home in the near future, ordering your credit reports and scores is one of the first things you should do. You want to review your reports for accuracy, and you want to review your score so you'll know where you stand in terms of creditworthiness.

By law, you are entitled to one free credit report per year, from each of the three reporting agencies (Experian, TransUnion and Equifax). Recently, these companies made it easier to obtain all three of your credit reports at once by creating a joint website: AnnualCreditReport.com.

Review your report to make sure there are no errors or inaccuracies within the data. You should also keep an eye out for suspicious activity, such as a loan that you did not take out, as this could be a sign of identity theft.

You will have to request your credit score separately from your reports. The best place to do this is through the website owned by Fair Isaac Corporation: MyFICO.com. Once you have your score in hand, you'll know if it's good, bad or average. The average credit score in the U.S. right now is about 680. The average score in Virginia is slightly higher than that. These numbers are according to the National Score Index maintained by Experian.

Improving Your Credit Score if Necessary

If you find that your score is lower than average, you will want to improve it as much as possible. Actually, improving a credit score is a worthwhile venture for any consumer, but particularly those who (A) have a below-average score and (B) plan to buy a home in the near future.

One of the best (and fastest) ways to improve your credit score is by paying all bills on time and by reducing certain aspects of your debt, particularly those credit card balances. You should also ensure that your credit reports are free from errors, as these can drag your score down as well.