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Protecting Your Credit Score So You Can Buy a Washington DC Home

Protecting Your Credit Score So You Can Buy a Washington DC Home

Understanding how credit works is an important part of financial literacy, especially for folks who are planning on purchasing a home in Washington DC. According to statistics from Urban Institute, 14% of white communities and 21% of communities of color that reside in Washington are in debt. This can stem from credit or unpaid bills, preventing individuals and families from working towards their dream house. On the flip side, a healthy credit score can be their lifeline to homeownership.

Here’s how you can protect your credit score and be financially well enough to start looking for a place of your own in the DC area.

Your Credit Score and Homebuying

Mortgage lenders and banks factor in your credit score when they examine what loans you may qualify for, or if you qualify at all. Your score will affect the rate, loan amount, and down payment required of you. When you take on a mortgage, you’re essentially signing up to make on-time payments every month for anywhere from ten to thirty years. Property sellers want to check if you’re responsible enough for that commitment, and they check through your credit score.

In Practical Ways to Save Money to Buy a Washington DC Home we point out that the median property price in Washington DC crossed over a million dollars in 2020. For this reason, buying a house on credit is the most accessible method to homeownership, especially for a lot of first-timers. But a bad credit score lowers your chances of getting approved for a mortgage. In fact, the average American household has over $15,000 of outstanding debt, which definitely is a hindrance to homeownership.

Credit Score Basics

As defined in a CNBC article, a credit score is a number that represents your creditworthiness. It can range from 300 to 850, and the higher it is, the better. A credit report is a compilation of your credit history containing information on your credit accounts, payment history, balances, and more. These are all handled by a credit bureau, an agency that is also in charge of reporting it to financial institutions and other parties like – you guessed it, real estate companies.

How Credit Checks Affect Your Credit Score

A credit check is another important aspect to learn about your credit score. Upgraded Points explains that these are performed by lenders and creditors, and can come in the form of a soft check and hard check. Soft checks reveal your credit history, but are only performed as part of a background check, thus it does not affect your score. But applying for a home loan will require a hard check, which consequently lowers your credit score because it indicates a financial risk you are planning to take. 

Preparing Your Credit Score for Homebuying

So how do you prepare your credit score for homebuying in DC? The most important factors that can lead to a low credit score include not paying bills on time, applying for too many credit cards and loans, and of course, racking up more debt through unnecessary purchases. Moreover, getting multiple credit checks in a short period of time can be damaging. Five points on average can be dropped from your report with every hard check, and this effect can last up to two years.

For those planning to purchase a DC home on credit, you’ll want to shoot for a score above 620 at the minimum, but a score of 700 or higher will likely get you better interest rates. The type of loan will also require specific minimum credit scores, which is another thing to keep in mind. A Washington Post report also points out that due to rising expenses in the past year, credit standards are tightening alongside the economic landscape. Credit card debt is very risky, so it’s best to do thorough research as well.

The Silver Lining

Fortunately, taking on a mortgage can also affect your credit score positively. You can view building equity through homeownership as an investment that will also benefit you in the future as property values increase, as we highlight in Why Buying a Washington DC Home Now is a Moment of Opportunity. Moreover, it’s also a chance to strengthen your score as long as you don’t miss any payments and make them on time. Ultimately, this depends on your responsibility and financial habits.

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