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These simple tips will help you figure out your budget if you’re looking to buy a home or car.
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Millions of Americans may feel like they can no longer afford to buy a home because of rising home prices, but what if it’s actually because they don’t know how to buy a home?
According to credit scoring company FICO, in a survey shared with USA TODAY, 59% of Americans said they didn’t fully understand the steps required to buy a home, and that number rose to 64% among first-time homebuyers. Even among prospective homebuyers who are actively planning a home purchase, half said they don’t fully understand the process. Additionally, about 1 in 5 Americans, including 1 in 4 prospective homebuyers, underestimate the impact that credit scores have on mortgage rates and say they either believe it has little or no impact or are unsure.
The obstacles to buying a home aren’t all economic. Many homebuyers have more control than they realize.
“Consumers looking to buy a home next year face real headwinds, primarily due to current interest rates and home prices, but that’s not the only challenge,” Jenelle Dito, FICO’s vice president of consumer empowerment programs and partnerships, said in an email. “A surprising number of prospective buyers face a lack of knowledge about the home buying process.”
What should potential home buyers know?
Financial experts say buyers first need to know their credit score and make a plan to improve it.
A FICO survey found that 85% of Americans consider credit score management to be a wealth-building strategy rather than just a borrowing tool, but about a quarter of them don’t know their FICO score.
Lenders use credit scores as one measure to decide whether to approve a loan and the terms, such as interest rates. A high credit score tells lenders that you are at low risk of defaulting on your mortgage. Most conventional mortgages require a minimum credit score of 620 or higher for homebuyer approval, but some first-time homebuyers may be eligible for special government-backed loans with more relaxed approval requirements, Equifax said.
Despite this, the study found that 17% of prospective homebuyers did not take steps to improve their credit score before purchasing. Additionally, more than a quarter said they do not encourage co-applicants to do the same.
How can potential home buyers improve their credit scores?
According to FICO, renters, who make up the majority of first-time buyers, have ample opportunities to build their credit scores every day, but they often don’t realize it.
Half of renters don’t know that paying their rent on time can help improve their credit score, a survey has found. More than a quarter said they would be more prepared to buy a home if they understood how rent payments would affect their credit history.
“It’s best to start monitoring your score at least six months before you start the process to give yourself time to make meaningful financial improvements,” Dito says. “Actively tracking your financial habits and identifying where there is room for improvement is an effective way to build credit and secure better terms with lenders.”
Shopping is also important
Nearly three in five Americans say they don’t fully understand the steps involved in buying a home, and that number rises to 64% among first-time homebuyers, according to a FICO survey.
“Interest rate shopping is a great example of an activity that may confuse many people, but can ultimately lead to big savings,” Dito said.
Experts say many homebuyers don’t realize that multiple mortgage-related credit inquiries within a short period of time (usually 45 days) are treated as a single inquiry when calculating their score. So, as with any major purchase, people should shop around for the best deals.
“There’s little harm in shopping around, and even a small difference in interest rates can translate into tens of thousands of dollars over the life of the loan, so it’s well worth the effort,” Dito said.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Contact her at mjlee@usatoday.com and subscribe to the free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning..
