Think you're ready this year to go to the mat and finally buy an apartment? First order of business is to make sure your finances are in good shape. When you submit an application for a mortgage, one of the first things the bank will do to decide whether you're lend-worthy is run a credit check. And the lower your numbers, the higher your interest goes—or you can't get in the game at all.
"If your credit score is lower than 720 and you're going for a loan that's backed by Fannie Mae or Freddie Mac, there will be an add-on cost," says Robbie Gendels of National Cooperative Bank (full disclosure, a BrickUnderground sponsor). "That can be a quarter of a point higher interest rate or more," she says. (Note: While most lenders—especially big banks—use Fannie and Freddie-backed loans, there is a $625,500 loan limit on those).
Score under 680, says Gendels, and you likely won't qualify for any type of mortgage. Avani Ramnani, a financial planner with Francis Financial, puts the minimum cutoff at 660. And though a small uptick in rates may not sound all that significant, he says would-be buyers should remember that "a seemingly insignificant amount of difference in interest rates may turn into thousands of dollars over the life of the loan."
Find out your credit score before you start shopping around
Some banks will give you your credit score for free. But you can also find out your score and read your full report from Myfico.com. The $19.95 FICO Standard package gives you 30-day access to one FICO score and a credit report from one of the three major credit agencies (Equifax, Experian or TransUnion). For $59.85, you'll get 30-day access plus credit reports from all three major agencies.
Note that your report may be long—we're talking 60 pages or so in some cases—so you want to set aside time to read it and make sure there are no inaccuracies. "There can be mistakes," says financial planner DeWitte Kersh. "I always tell my clients that they have to be responsible for their FICO scores. If you suspect an error, you need to reach out to the credit card companies or lenders and try to get it corrected."
Note: Credit scores are updated on a monthly basis so it could take a while to get inconsistencies all squared away.
What influences your credit score
There are five factors, says Ramnani: past payment history (the more bills you pay on time, the better your score); amounts owed ( high percentage usage of available credit result in lower scores); length of time a consumer has had credit (a longer credit history leads to higher scores); new credit (opening a lot of new credit cards/loans lowers your score); type of credit (having different types of credit like installment loans, credit cards, and retail accounts increases credit scores).
Also, remember that if you're applying for a mortgage with your partner, the bank looks at the lower credit score when deciding whether to lend and at what interest rate to lend.
If you pay your taxes late, that can hurt your credit score, too. And if you have a minor civil court dispute—say, a vendor sues you for not paying them for something—that'll be reflected in your credit score.
Divorce can also be hard on your numbers, says Kersh. "If you have a joint account and your ex has debt, that'll affect you," he says. "Oftentimes, people who are getting divorced don't even know the other person is defaulting on a loan before they see their credit score."
How to improve your score
Making timely payments is of utmost importance. That's why experts suggest setting up automatic payments. "A lot of people have the money, but they just forget to pay their bills on time," says Kersh. Adds Gendels: "Even a one-time 30-day-late payment can affect your rate."
Also, you'll want to avoid making a large purchase before you close on the loan. Incurring any additional debt or opening up new lines of credit is not a good idea. "You'd have to provide a paper trail and explanation for everything," says Gendels. And the more debt you take on, the riskier you seem as a buyer.
As much as possible, try to pay off your debts (even a little—it doesn't have to be all of it) and decrease your overall debt owed.
Why you should start cleaning things up early
"Usually, it takes a few months to see any significant difference in your credit score. Therefore, we advise our clients to start working on this approximately one year before they think they might need to apply for a mortgage," says Ramnani.
"We tell clients to take six months (before they plan to apply for a loan) and pay everything on time," says Kersh.