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Building credit to purchase a home: Tips on how to establish credit, improve credit score and understand the impact of credit on mortgage options

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Do you want to know how to build the ideal credit history for buying a home? This is a basic requirement for getting the best terms. Some people hoping to purchase a property may find that their credit is poor or, in some cases, nonexistent.

What can you do about this? Virtually every lender requires a good credit history and the first step is to understand what this means. Financial institutions will almost always request a credit report which will determine your interest rates and whether you can even qualify for a mortgage at all. If you want to build a better credit history, Rocket Mortgage® will tell you everything you need to know.

What you should know about building good credit

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In the United States, there are different credit bureaus, who maintain a thorough record of your financial activity. This tells potential lenders about your spending habits and verifies that you pay your debts in a timely manner. This information also includes details such as the cities where you have lived, your employment history and your credit history.

These agencies also have specific information about the number of loans you have applied for and whether any are delinquent or have been canceled, and if you are up-to-date on your payments. Details about your transactions are also recorded, taking into account credit limits and the due dates. All of this information will be used to determine your credit score as well

Credit history vs. credit score

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A credit history is a detailed record of your financial history. A credit score is a three-digit number, which reflects the health of your credit history.

The credit report consists of four sections:

The first section contains your personal information. That is all variations of your name and your social security number.

The second section is a comprehensive description of all of your current lines of credit.

The third section reports on how you have managed your various lines of credit. It identifies bankruptcies, lawsuits and tax liens.

The fourth section of the report lists all entities that have requested information about you to determine whether to approve credit cards, loans and other financing.

After analyzing this information and calculating your FICO score (that is, obtaining the three-digit credit score), financial institutions will assess whether you qualify for a loan. If you have paid all your debts in a timely manner, you are more likely to have a higher credit score, making it easier to obtain loans with good interest rates.

If you’re interested in reviewing your credit score, Rocket Homes℠, affiliated with Rocket Mortgage, offers assistance. Rocket Homes provides insights and monitoring of your credit history. With Rocket Homes, you can access your TransUnion® credit report, which is refreshed every week for the latest details, alongside your VantageScore® 3.0 credit rating.

How can you improve your credit score?

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What can be done to improve your credit score? Experts advise maintaining good financial habits such as having a mix of credit credit cards and paying off each card on time and keeping your oldest accounts open, without exceeding more than 30% of your credit limit.

It is recommended that you avoid taking out loans making charges that exceed your budget, as this increases your risk of falling behind on payments and lowering your credit score. It is also advisable to pay bills on time, as some financial agencies qualify you, in part, based on your payment history. Rocket Mortgage offers these tips:

Pay your credit cards on time

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If you have debt payments make a calendar with the due dates or opt for making two monthly payments. This is a strategy that some people use to show credit agencies that they have the solvency and financial responsibility to pay off loans and credit cards from other institutions. This also helps you develop financial discipline and pay off debts faster.

Your pattern of making credit card and loan payments will give lenders a general idea of how responsible you are in handling your debt.

Don’t apply for new lines of credit

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Are you thinking about applying for a new loan or credit card, but you haven’t finished paying off the current ones yet? Except for some emergency cases, financial experts recommend refraining from asking for more credit than you can afford to pay off. This applies to everyone, but especially those with poor credit.

When you apply for several credit cards or loans at once, this alerts banks, who will wonder why you need these additional funds.

Check your credit report for errors

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It is common for a credit report to contain small errors. Many people go years without thoroughly checking their credit history. Reviewing it annually is key to monitoring your financial patterns as well as quickly identifying any erroneous or fraudulent activity.

The good news is that errors in your credit history are often reversible. You usually just need to provide conclusive proof that the information is wrong and you can fill out a form to quickly update your report. Another positive aspect of this process is that the financial institution that made the error will be responsible for sending the new report to those who have received your previous credit history.

Consider applying for a prepaid credit card

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People have several options for improving their credit score. One way to do it is by applying for a prepaid, or secured, credit card.

If you incur a debt and you don’t have enough money to cover it in full, the first option you might consider is to close your account. However, this will negatively affect your credit history. A prepaid or secured card helps you avoid closing the account or failing to make payments because you pay your credit limit ahead of using the card.

How to build a good credit history

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There are a couple ways to build a credit history but it’s important to remember that it may take time. Not only may you need to start using credit, you’ll also need to do so strategically. Some financial activity won’t be taken into account when determining your credit score, but behaviors like applying for multiple loans at the same time and making late payments will negatively affect your credit history.

To apply for a loan, you will need to prove you make enough money to pay it off. Income is verified through pay stubs, bank statements and tax returns.

Add an authorized user who has good credit

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The advantage of applying for a bank loan or credit card with two responsible users is that, although the responsibility for payments falls on both users, the person with the lower score will have access to better rates because of their co-signer’s good credit.

In this way, those with low credit scores can gradually improve their credit history and score. At the end of the loan term, it will be easier to qualify for a mortgage.

Pay your mortgage and other loans on time

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Did you know that paying your mortgage on time helps improve your credit score? Since it’s a fixed payment over several years, paying it promptly each month will help demonstrate to credit agencies that you are a responsible borrower and have the means to cover your debts.

For those who rent and have not yet bought their first home, it’s possible to report rent payments to build a credit history. According to experts, the landlord’s verification of timely payments has proven to be very useful in generating positive credit reports.

In conclusion

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There are two fundamental reasons to improve your credit score before buying a house. The first is that it will increase your likelihood of qualifying for a mortgage. The second is that the higher your credit score, the better your interest rates and mortgage terms will be.

Remember that Rocket Mortgage is here to help you. We offer you advice so that you can have answers to those financial questions that take you closer to finding the perfect home. We invite you to visit Rocket where you can ask questions and continue acquiring tools to purchase the property you’ve always wanted.

Rocket Mortgage, LLC; NMLS #3030; Equal Housing Lender. Licensed in 50 states. For additional information please visit 

Rocket Mortgage, LLC and Rocket Homes Real Estate LLC are separate operating subsidiaries of Rocket Companies, Inc. (NYSE: RKT). Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation and applicable legal and regulatory requirements. 

Rocket Homes® is a registered trademark licensed to Rocket Homes Real Estate LLC. The Rocket HomesSM Logo is a service mark licensed to Rocket Homes Real Estate LLC. Rocket Homes Real Estate LLC fully supports the principles of the Fair Housing Act. For Rocket Homes Real Estate LLC license numbers, visit California DRE #01804478. Hawaii License # RB-23371. TREC: Information about brokerage services, Consumer protection notice. 

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