First Time Homebuyer: Steps to Success (Step 1)

It may not seem like it, but there is a process to buying a home, and taking certain steps in the proper order just about guarantees success. Taken out of order — putting the cart before the horse — the steps are inefficient and counterproductive, and the process becomes chaotic.

Remember when you were learning algebra? If you tried to take a shortcut, you would get the wrong answer. The steps are there for a reason, and they simply must be followed in order if you’re to be successful. Over the next three posts, we’ll take a look at the three steps you must take before looking at even one home for sale.

Today, we look at the first step: Figuring out where you stand financially. If you’ll need a mortgage loan, this is the most critical step in the process, and it can make or break your house budget.

Step 1: Check Your Credit

When faced with a loan application, the first task on a lender’s to-do list is to order the applicant’s credit reports and determine his or her credit score. This score is produced by Fair Isaac Corporation and is known as your FICO® score. This score not only reflects your credit risk but will be used in the determination of the interest rate you’ll be offered.

Calculated from the data in your credit reports, FICO® credit scores range from 300 to 850, and FICO® uses five categories in the calculation:

• Payment History: FICO bases 35 percent of its score on your payment history.

• Account Balances: 30 percent of your score is based on your current account balances listed in your credit reports.

• Length of Credit History: This category is used to determine 15 percent of your credit score.

• New Credit: 10 percent of your credit score depends on the new credit obtained.

• Types of Credit: The types of credit you use account for the final 10 percent of your FICO® score.

This formula is not set in stone. People who have short credit histories — young people, for instance — are weighted differently than those with long credit histories. You are entitled to a free copy of your credit report from each of the three major credit reporting agencies once a year. Make sure you order the reports at AnnualCreditReport, the only site authorized by the federal government.

Next time, when we take a look at Step 2 in the home-buying process, you’ll learn how to clean up your credit and raise your score.