It is a well-known fact that Millennials are facing the steepest challenges of any other generation when it comes to buying a home. Millennials are a saddled with much lower debt to income ratios than previous generations. Additionally, the majority of this generation start off their early twenties saddled with student loan debt or bad credit and a lot of the time both, Having bad credit impacts the interest rates offered by lenders for a mortgage. Understanding credit reports and why they are so important can go a long way to help alleviate the financial pressure many Millennials face today and taking steps to improve their credit scores is the best way to prepare this generation for the changing landscape of home ownership.
What are credit reports?
A credit report is the report card of one’s credit history and the score on that credit report is what a lender will use to judge a potential borrower on their creditworthiness. This information includes a history of all credit data from auto loans and student loans to collection judgments and credit cards. This history is collected and maintained in a database by the three major credit reporting bureaus Equifax, Transunion, and Experian and can go back up to 7 years by law.
What is so important about a credit score?
A credit score is used to judge a person’s creditworthiness and is used by a variety of businesses such as employers, landlords, banks, and creditors. The entities just mentioned use these scores to determine a how likely a person will be to pay back a loan, be able to afford rent, or if they make smart financial decisions and are responsible with their money. Having a good credit score can make the difference between tens of thousands of dollars in interest on a mortgage, getting a job, or even being about to find a good rental unit.
When it comes to real estate specifically, the credit score of a buyer is the most important factor used to determine which homes a potential buyer can afford. Credit scores affect nearly every aspect of buying a home including interest rates, down payments, and pre-approval for a loan.
How to improve a credit score?
Improving a credit score is very simple. The most important aspect of improving one’s credit score is to start using credit wisely. The biggest mistake people make with credit is not understanding how to use it. The credit companies know that younger people do not understand how to use a credit card properly. Most young people make the mistake of thinking a credit card is “emergency money,” and they start off their lives with an early ding on their credit report. Use credit cards only for expenses that are already being made on a regular basis, like groceries or gas. Get a free credit report and check it for errors. If errors are found then send a certified letter to the appropriate reporting bureau requesting the error be corrected and removed from the report.
What are the alternatives to buying a home?
As an alternative to buying a home with a traditional mortgage, there are rent-to-own homes. Check out our listings of rent-to-own homes to move one step closer to home ownership.