How to Get Your Credit Mortgage-Ready

If you are considering buying a home, it’s important to understand the role that your credit score will play in your ability to qualify for a mortgage loan. Keep in mind that different mortgage types will have their own minimum score requirements. For example, borrowers must have at least a 580 FICO score for a traditional FHA loan while conventional lenders will want a credit score above 620-640. However, the higher your score is, the lower rate you’ll qualify for and the less interest you’ll pay over your loan term.

To reap the maximum benefit, many potential borrowers choose to work on their credit before applying for a loan. Here are some tips that you can use to get your credit ready to purchase a new home:

1. Review Your Credit Report

A good rule of thumb is to check your credit report at least 3 to 6 months before you plan to apply for a mortgage so that you have sufficient time to clear up any discrepancies. You should know everything that is being reported each month. If there is something you don’t recognize, call the creditor that’s listed on the account to get more information. You can get your annual free credit reports for all three major bureaus at https://www.annualcreditreport.com/index.action.

2. Dispute Inaccurate Information

Many people find errors on their credit report, and these errors can have a negative impact on your score. For example, if you find items you’ve paid on time showing up as late, you should file a dispute with the credit reporting agency. There are three agencies: Transunion, Experian, and Equifax. You’ll find that your report varies between bureaus because creditors don’t always report to all three. When you file a dispute, the agency will conduct an investigation and, if found in your favor, adjust the report accordingly. According to the Fair Credit Reporting Act (FCRA), credit bureaus typically have up to 30 days to correct or remove inaccurate information.

3. Have a Diverse Credit Profile

To qualify for a conventional mortgage, you will need at least three credit tradelines (and just two if you intend to do an FHA loan). It’s a good idea to round out your profile with different types of credit, including revolving accounts like credit cards with a combination of installment accounts like auto loans, student loans, etc. This shows that you know how to handle various kinds of credit responsibly. These accounts should be in your name as many lenders will discount authorized-user accounts when determining your individual creditworthiness.

4. Keep Credit Card Balances Low

Typically, conventional lenders will want to see 12 to 24 months of positive payment history on your credit accounts before you will be able to qualify for a mortgage. To maximize your score, it’s important to maintain low credit card balances. Lenders recommend a debt-to-income ratio below 30 percent, but lower is even better for your score. Avoid buying anything on credit 3 to 6 months before you apply for your loan. This will keep you from overextending yourself and give you time to pay down your balances, which should also help increase your score.

5. Avoid Excessive Credit Inquires

Every time you apply for new credit, a lender pulls your credit report, which can lower your score by a few points. These inquiries will remain on your report for two years, but they only affect your score during the first year. If you have too many inquiries on your report, it can imply that you’re desperate for credit, which would make you a “risky” candidate for a home loan. Try to limit inquiries as much as possible in the 6 to 12 months before you plan to apply for a mortgage.

6. Don’t Close Old Credit Accounts

Now that you’re prepping your credit for a future home purchase, it may be tempting to close out those older accounts you’re no longer using, but this isn’t the time to do it. Closing these accounts can actually decrease your score dramatically because you’ll be erasing all your payment history on those accounts and shortening your average length of credit. Instead, try to utilize them every few months for a small purchase so that they remain an active tradeline on your report. Using old accounts and keeping them in good standing can have a great impact on your score.

7. Avoid Obtaining New Lines of Credit

Opening new credit lines can temporarily decrease your score because they lower your credit age, so it’s best to avoid obtaining any new credit once you’re 6 to 12 months away from applying for a home loan. Lenders want to know that you’ll be able to pay back their loan responsibly, so they like to see a solid history of on-time payments on each of your accounts.

8. Use the Same Account for Expenses

Your lender will usually ask for several months of bank statements to ensure that you have the funds to pay for the home. Make sure all your money is in the bank—rather than using cash or credit cards—so that you have an easy paper trail showing where your money is going each month. To minimize the paperwork, it’s a good idea to use the same account for all of your expenditures. If you do transfer funds into another account, you’ll need to have a paper trail for that account too.

Taking these steps can help you improve your credit score and qualify for a low-rate mortgage loan in less time than you might think. Even if your credit isn’t in great shape, you can turn it around by making your credit payments on time every month and keeping your balances as low as possible. Lenders are more forgiving of past credit mistakes as long as you’ve shown a pattern of responsible usage in your more recent history.

To learn more about how you can become a homeowner, contact Premier Realty today. We look forward to helping you get into your dream home.