8 Ways to Improve Your Credit before Applying for a Mortgage

We’re often asked about our best advice for future homebuyers, and at the top of that list is to make sure your credit is solid is before you start house hunting. Your credit health will have a big impact on whether or not you get approved for a home loan — and how much interest you will pay over the life of your mortgage. Even an eighth of a percentage point can be a big deal when you’re paying interest over 30 years, and lenders verify every aspect of your financial background before making a loan, so consider these tips to improve your credit before you begin the mortgage application process.

  1. Check your credit report.

Typically, a credit score, or FICO score, above 620 is necessary for a conventional mortgage from most lenders, and above 700 is more ideal. A good first step is to check your credit report to see what your baseline is. These free reports are available from all three major credit bureaus — Equifax, Experian and TransUnion — at annualcreditreport.com. You are entitled to a free report from each of these credit bureaus once a year. The information on your report shows lenders how much debt you have, how you manage credit, and how consistent you have been in making your payments on time. Each bureau calculates scores in different ways. For example, some include your rent payments while others factor in your employment history. Generally, all three bureaus should generate fairly similar scores for you.

  1. Check for mistakes.

They happen! A store or cable company may get you mixed up with another customer with your same or a similar name, resulting in you taking a hit for someone else’s late payments. If you see inaccuracies in your report, now is the time to have them corrected. Correcting mistakes takes time — up to sixty days — so be prepared to make some calls or to write letters, to both the credit agency and the business itself. It pays to be organized, so keep copies of all your correspondence, and make a note of the name of anyone you speak with. Credit bureaus also have handy instructions on their sites on how to dispute an incorrect listing in your report.

  1. Stop carrying a balance on your credit cards.

While you’re getting ready to look at houses or submit an application for a mortgage, the fewer big purchases you make, the better. Carrying too much credit card debt is one of the most common barriers to being approved for a mortgage because it causes lenders to view you as more of a risk. If you’re in the habit of paying off your monthly statement balance, then it’s okay to make purchases with your cards during this period, but pay early if you can. If you’re currently carrying a balance, then go on a spending diet, pay down as much debt as much as possible, and leave your cards at home for a bit.

  1. Make payments on time.

Your payment history is 35% of your score, so be sure to pay all your bills on time and definitely avoid missing payments. A single missed car payment can have a big impact on your report. Play it safe and pay off even small outstanding balances, and don’t forget about any auto or student loans that you may have.

  1. Hold off on applying for new credit or taking out other loans.

Opening up a new credit card can lead to credit inquiries, which can have a negative effect on your credit score. At the same time, don’t close old accounts. Focus on keeping your credit profile quiet while you prepare for a mortgage application — in this instance, boring is good.

  1. Start saving.

Review your monthly spending budget and see where you can cut back. Small things like cooking at home rather than going out can make a difference. Look at it as a fun challenge, as you keep that new home in your sights. In general, the larger the down payment you can make, the more you will save in the long run.

  1. Don’t make any big life changes, if you can help it.

Unless a job change results in significantly higher income, keep your current job until after you have been approved. Keep big purchases to a minimum. This isn’t the time for a new car purchase or charging a vacation. Lenders will check your debt-to-income ratio, meaning how much you make compared to how much debt you owe. To get the best terms, reduce your debt-to-income ratio as much as possible before you apply.

  1. Start now.

Strengthening your credit may take months, not days, so get ahead of the game. The earlier you can make sure your credit cards are paid off and you have a solid history of making on-time payments, the better. Pretty soon, it will all be worth it — a strong and accurate credit report greatly improves your chances of a smooth mortgage application process.

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