After 12 months of tumultuous politics, wild weather, and tacky fashion trends, 2017 is finally coming to a close. If you’ve spent the year focusing on what credit repair company has the best reviews, and what you can do to further your credit repair efforts you may be considering reaping the rewards of your credit clean-up thus far by investing in a new home. While making an investment that will grow in value over time is never a bad idea, there are many considerations to keep in mind when deciding whether to rent or to purchase a house- not the least of which is how it will affect your credit score in the future!
Is renting or buying healthier for your credit score?
Well, that depends on your unique financial situation.
Making rent payments on time does improve your credit score some but making those same timely payments toward owning your own home impacts it more. That seems simple enough, but unfortunately, many other credit-health factors also come into play when it comes to homeownership. Read on for some important questions you should ask yourself before making your final decision.
What is your current credit score? Learn how to read your report
Everyone knows that your credit history is vitally important when looking to find your forever home. After all, it’s only natural for lenders to want some reassurance that you’ll be capable of paying them back before entrusting you with tens (or hundreds) of thousands of dollars! However, your credit score doesn’t only come into play when lenders are deciding whether or not to give you a home loan. How diligent you’ve been focusing on your credit score repair goals also affects the terms of the mortgage you receive.
If you want lenders to offer you the lowest interest rates and thus the minimum monthly payments possible on your mortgage, you’ll need an excellent credit score- one that’s in the 700s or higher. Decent rates may still be available for scores in the high 600s range, but it depends on the preferences of your lender. If your score is below 660, you may be better off focusing on credit cleanup for another year or so and waiting to attempt to be approved for a home loan until the numbers are in your favor.
You may not realize that an unfavorable credit score doesn’t necessarily mean that you won’t be able to qualify at all for a home loan. Don’t worry; you’re not the only one. It’s a common misconception that bad credit means home ownership is entirely out of the question. However, a credit score in the 500s qualifies you for what industry experts call a ‘subprime’ loan. If you are desperate to get into your dream house as soon as possible, you may wish to take advantage of this special subsidy.
Most programs that offer large home loans for buyers with bad credit require you to pay higher interest rates and additional fees at closing. This takes more money out of your pocket that could potentially work toward paying down other bills and further credit score repair. If the monthly payments are too high, they could even result in your missing payments for other debts and thus decrease your overall credit score.
Ultimately, avoiding the increase in long term costs associated with taking out a mortgage with less than perfect credit may just be worth the wait while you put a little more time in to credit clean up.
How steady is your job?
Although a newly purchased home is going to be their biggest constant in life for the foreseeable future, many people don’t consider what lies ahead for their budget when deciding to sign the dotted line. After all, it’s exciting when credit score repair is successful, and it’s only natural to want to celebrate. Just because you can get approved for a home loan immediately, that doesn’t always mean you should, though. If you’re working a temp job or under a contract that ends soon, now may not be the best time to make such a significant investment. Even if you can comfortably pay the mortgage now, you will need to be confident you can do the same later. Chronically missing mortgage payments due to a change in income doesn’t look good on a credit report, no matter how many credit clean-up techniques you try.
Can you really afford homeownership?
Even if your credit clean-up efforts pay off and your monthly payments for renting versus purchasing a home look the same on the surface, they won’t be equivalent. That’s because renting comes with the added benefit of a landlord that will take on the cost of home maintenance and surprise repairs. Once you become a homeowner, you will be financially responsible for every aspect of your home. If an appliance dies, roof leaks, or a neighborhood kid accidentally hurls a baseball through your window- you’ll be the one paying the cost. If you don’t have a nice nest egg set aside for such unexpected expenses, you may end up needing to put them on credit. Doing so could completely undo your credit score repair efforts if you don’t have enough wiggle room in your budget to make the monthly payments on time.
Purchasing a home has definite advantages to renting one- and not just because it means you don’t have to deal with a nosy landlord always dropping by! Not only does paying a mortgage on time put money towards something you’ll eventually own, but it also can further your credit repair efforts by making a hugely positive impact on your credit report. However, making such a large investment before you are ready can foil even the best credit cleanup plans! If you think you may not be able to make the payments in the future, or if you don’t have savings set aside for home maintenance, perhaps renting would be better for your credit score. Whichever path you choose, be proud that you have improved your finances enough even to consider homeownership!
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