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5 tips to improve your credit score in 2021

By Mitch Mitchell – MORTGAGE SENSE – JANUARY 20, 2021

If 2021 is the year you’re going to make the leap to becoming a first-time home buyer, we’re rooting for you. But before you go out and start house-hunting, remember that the initial step is to get pre-approved for a home loan. To do that, you’ll want to get a handle on your credit history and credit score. The key factors that make up a credit score are:

  • payment history
  • the total amount owed
  • length of credit history
  • types of credit in use
  • new credit accounts

If your credit is less than perfect, non-existent, or otherwise holding you back, it may be time to consider some ways to increase your score so that you can begin the process of buying your first home. Improving a credit score to buy a house takes time, effort, and focus. To help, we pulled together five tips on how to improve your credit score before you apply for a home loan.

1. No credit is no good

Sometimes a lower credit score is given simply because a person has no credit history to base a score on. Some people simply are adamant that it’s not a good practice to borrow money. While that’s rare in this day and age, it is possible. If you haven’t borrowed any money for a student or car loan and you haven’t opened any credit card accounts, there’s no history to make up your credit report at all. 

Having no credit can make a lender hesitant to work with you. If you’re hoping to qualify for a mortgage down the road, you’ll want to rectify that sooner rather than later. Open a credit card or two and make a few purchases on those cards so that you start building a record of using credit and paying it back on time. Over time, being diligent with payments on those cards can show a potential lender that you are a responsible borrower and a good prospect for a home loan.

2. Be smart about credit 

Being responsible for using existing credit is the best way to improve your credit score. For example, if you have a charge card for a retailer or a bank card that offers future travel points, use it on repeatable purchases like groceries or gas for the car. Keeping the balances low and consistently paying off those purchases every month will create a history of responsible credit behavior that will go a long way towards improving your credit score. 

Aiming to use no more than 10% of your allotted credit line is also a good rule of thumb. It shows that you won’t misuse your credit and fall into debt. Also, keep in mind that maxing out a credit card can hurt your score even if you pay it off in full every month. This is even true on a card with a low credit limit, so know the credit limits on each account you have.

3. Make a plan to reduce debt (or better yet, eliminate it) 

It doesn’t take long for a little bit of debt to become a serious long-term problem. Paying for something like a vacation with revolving debt — like the kind you get with many credit cards — can take years to pay off and damage your credit score. That’s not something you want on your credit report if you’re looking to buy a home. What’s needed is a concerted effort to reduce or eliminate debt. 

Many people drowning in debt try increasing monthly minimum payments by just a bit across all their accounts, but that barely moves the needle. Instead, it might be better to tackle the problem by focusing on one account at a time. If you make a significantly bigger payment to only one account each month until that debt is completely repaid — while still making the minimum payment on all other accounts — you’ll notice the debt shave off more substantially. When one is paid off, leave it be (remember, don’t close it) and rinse and repeat with your next account. Keep it up until all your debt is paid down. 

4. Look for lower interest rates  

Another thing you can do to reduce debt is to ask for a lower interest rate. The chances are that you opened a charge card account or bought a car when interest rates were higher. Because so much of a monthly payment goes towards the interest charge and not the actual balance, higher interest rates keep you in debt longer. It’s a well-kept secret, but some lenders can and will renegotiate interest rates. Just be forewarned: customers who’ve paid on time every month are more likely to cut a deal on getting a lower rate.

It also pays to keep an eye out for promotions offering lower interest rates. Balance transfers (from one card or one bank to another) can often get you a lower rate, but be cautious: promotional rates often have expiration dates. Try to pay off any balances before the promotional period ends or you may be subject to higher interest rates after that.

5. Don’t close accounts in good standing

If you have outstanding balances on credit cards, car loans, or student debt — but they’re in good standing and you’ve been making your monthly payments — keep at it. Regular, on-time payments are the solid foundation for a great credit score. But if you’re thinking of paying off a balance entirely and closing down an account, hold that thought for a second. 

Credit bureaus — the businesses that create credit reports — love when borrowers have zero-balance accounts. It shows that even though you have credit available, you’re responsible enough not to use it. While getting rid of an account may sound like a good idea, it could actually hurt your credit score. Keeping an active account open with no balance looks better than having a closed account. Wait until after you close on your new home to cut up any charge cards you no longer need.

Ready to improve your credit score this year?

There are many great federal financing programs available for first-time homebuyers, including FHAVA, and USDA loans. Plus, you might want to look into conventional mortgages from Fannie Mae and Freddie Mac or home renovation loans. Many U.S. states and cities also offer first-time buyer programs and grants for a down payment, financing, and closing cost assistance. 

When it comes to applying to be pre-approved for a home loan, it pays to lay the groundwork with a good credit score. Contact a loan officer in your area to learn what else you’ll need to prepare for and to discuss which program might be right for you.

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“The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.”
— Strength to Love, 1963 Dr. Martin Luther King, Jr.

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When Is a Good Time for a Price Reduction?

Factors to Consider Before You Drop Your List Price

Whether you call it a price reduction, an improvement, or an adjustment, nobody wants to hear about lowering prices except a buyer. In a buyer’s market or a slow period, it’s not unusual for sellers to point fingers at agents, and for agents to point fingers at sellers’ unrealistic expectations for a price. Still, there are some times when lowering your asking price is the right move. Before you do, there are a few questions to ask yourself so you can determine your home price-reduction strategy.

Are You Selling in a Buyer’s Market?

Demand falls when the market is slow and inventory is high. If that’s the case, and you’re don’t absolutely have to sell right now, then it may be wise to take your home off the market until things improve. You might be better off renting your house, or staying put until the market rebounds if you’re not highly motivated to sell.

Did You Start Too High?

If you initially priced your home too high, you’ll have to continually reduce the price until you hit that “magic” number. This is referred to as “chasing the market down,” and it’s not a good thing. Buyers will begin to wonder if something is wrong with your house. They’ll also wonder how much lower will you might be willing to go and decide to play a waiting game.

Have You Overlooked Anything?

Ask a friend to stop by and give you an honest opinion of how your house shows—honest being the operative word. Yes, your agent should have nailed this months ago. Your place should show like a masterpiece. But sometimes a fresh set of eyes can pick up on something that you and your agent missed. Find it, fix it, and see if things pick up.

If you’re making a habit of hanging around during showings, you should change it. An owner’s presence often makes buyers feel uncomfortable. Leave your prospective buyers to look around in peace. And don’t turn down showings simply because you don’t want to get out of the house.

The bottom line: Make sure you’re not unwittingly sabotaging your—and your agent’s—efforts before you take the scissors to your listing price.

How Is Your Marketing?

If you feel like the market is right for your asking price, and you’re not doing anything to get in the way, you might want to look at your marketing efforts. Before you reduce your price, consider whether you and your agent are making every effort to sell your home for what you think it’s worth. Questions to ask include:

  • How many hits has your listing received in the MLS?
  • Do the marketing comments sell the benefits or features?
  • What kind of direct mail campaign has been launched?
  • How many open houses have been held?
  • How does the house show online? Are there a lot of beautiful pictures?
  • Is your signage in a prominent location? Does it contain several phone numbers and a website?
  • Do you have a virtual tour published?
  • What kind of feedback have you received from agents and buyers?
  • Are you offering enough compensation to selling agents?
  • How many showings have you had?
Watch Other Listings

If you do decide to reduce your price, it’s important to be strategic about it. Pull up pending sales and find ones that had price reductions. How many days were they on the market (DOM) before the price was reduced, and how much of a price reduction was made? You won’t know the sold price, but you can determine average price reduction percentages. Ignore active listings without price reductions unless they’re similar to yours and the DOM are low.

Run side-by-side comparisons with active listings near the price point you’re considering. Price your home so it falls in the bottom two to five listings or—if you’re really determined—price it less than anything else on the market.

Properties that are priced below what buyers are readily willing to pay will receive multiple offers. This is the case even in distressed markets as home prices slide into downward spirals. In many cases, it’s common to see price wars develop among buyers who are competing, which then results in an accepted offer for more than list price.

Consider a New Listing

You might want to take your home off the market and put it back as a new listing at a different price so your reduction isn’t readily evident to any agents who look at your listing. An entirely new listing looks fresh and exciting to a buyer, and new buyers come into the market all the time. Not every agent studies the history of a listing, so this strategy can help you avoid the stigma of a price reduction.

The Bottom Line
Every seller wants to get the most they can for their home, and you should explore every alternative before you make a price reduction. But sometimes even a small price change can make the difference between a quick sale and watching your home languish on the market. An experienced agent should be able to help you answer the right questions and decide if a price drop is the right decision.

Keller Williams Realty & Project Destined

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