Step 1: Check your credit score

Deciding to buy a home is a major financial decision. For most people, buying a home cannot be done without a mortgage, so it is important that you know where you stand financially before making a large financial commitment. One important measure of your financial fitness is your credit report and score. The information in your credit report is critical to your financial life, and it plays a large part in determining the interest rate you are offered on a loan. This is why it important to check your credit before getting preapproved for a mortgage.

You are entitled for a free credit report once a year for free from each of the three credit bureaus (Equifax, Experian and TransUnion). These companies gather information about your payment and borrowing habits and form your credit report from the information they collect.

The information on your credit report determines your credit score, which is a number between 300 and 850. The higher your credit score, the better your chances of getting the best interest rates and a larger loan amount. If your credit score is low, it may reflect that you don’t pay your bills on time or that your outstanding debts are close to your credit limit. Lenders offset the risk of lending to people with low credit scores by increasing interest rates and lowering the limit that you can borrow.

When you receive your report, look it over for mistakes. Mistakes do happen, including mix-ups with similar names and Social Security Numbers. So if you have incorrect information on your credit report, you run the risk of having a lower credit score than you actually deserve, which can affect your mortgage rate. If you find incorrect information on your credit score, contact the credit agency to have them correct or remove the error. This may take a while, so do this as early as possible in the mortgage process.

Next step: Determine what price home you can afford.

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