Buying a home is an exciting experience. Selecting the house and moving in can be fun. What’s not as invigorating, however, is the process of applying for a mortgage.
Many people are concerned that their credit score may keep them from buying the house of their dreams. In order to rest easy as you move through the home buying process, it is a smart idea to improve your credit as much as possible.
If you implement these tips to improve your credit before applying for a mortgage, you’ll be in a good position for loan approval.
What is a Credit Score and Why is it Important?
A credit score is a quantified numerical value that estimates your creditworthiness to financial institutions. This number is based on several factors found in your credit report, which reports your credit history to banks and lenders.
Your credit report lists the following financial and personal information:
- All credit accounts, such as student loans, car loans, and credit cards. The credit limit for each type of credit and payment history are included in the report.
- Unpaid bills, like medical, rent, utilities that have been reported to a collection agency.
- Credit inquiries appear on your credit report. These are hard inquiries made by financial institutions when you apply for new lines of credit.
- Tax liens (except IRS), bankruptcies, and other financial public information such as alimony or child support can appear on your credit report.
Based on this history, a credit score is estimated. Credit scores fall between 300 and 850, with 850 being the highest credit score and 300 being the lowest.
A credit score of 700 and above indicates a trustworthy borrower. Alternatively, credit scores of 650 and below are “subprime” and these borrowers are subject to low approval amounts and higher interest rates.
How to Check Your Credit Report and Credit Score
Before you complete a mortgage application, you should get a copy of your credit report. This allows you to see what a mortgage lender will see when you apply for a mortgage loan. You can address any errors in the report and know which area to focus on to improve your scores. You are entitled to one free credit report per year. A credit bureau, usually Experian, Transunion, or Equifax, can provide your credit history report.
Keep in mind that credit reports list your credit history. These reports show you the information that makes up your credit score, but your actual credit score may not be on the free report. FICO is the credit score most lenders look at to approve you for a home loan, so you may need to visit their official website and pay a small fee to see your FICO scores.
How Can You Improve Your Credit Score?
Once you have a copy of your credit report and received your credit score, you can make a plan to improve your credit score. Implement as many of the following tips for improving your credit score as you can to ensure you don’t have to worry about qualifying for a mortgage.
Carefully Check Your Credit Report
Verify the information in the credit report. Ensure that all the accounts listed belong to you and that the payment information is up-to-date. Verify the public information matches your information. Report any inaccuracies to the credit bureau per their reporting procedures.
Pay Your Bills On Time
Lenders want to know if you will make your mortgage payments on time. If you have a solid history of making payments on time, lenders are more likely to trust you. Continue to pay your bills on time, or if you have struggled, focus on this area to improve your credit score.
Reduce Your Credit Use
Financial institutions want to ensure that you don’t use more credit than you can repay. To reduce your credit utilization ratio, pay off your cards each month. This helps you build a credit history while showing that you don’t spend more than you can afford.
You can also pay down accounts with large balances. Consider the snowball technique, where you focus on paying off the account with the largest balance first, followed by the second largest balance, and so on, until your debt-to-credit ratio is lower.
Deal With Negative Credit History
Deal with outstanding debt or delinquent payment history head-on. Make arrangements with those creditors or consolidate your debt to get these negative factors under control.
Don’t Open New Accounts
Hard inquiries into your credit history lower your credit score, so don’t open new accounts while you are in the process of applying for a mortgage loan.
Don’t Close Old Accounts
As counterintuitive as this may seem, you don’t want to close old accounts either. Old accounts in good standing keep your credit score higher because they help tip the debt-to-credit ratio in your favor.
Apply for a Mortgage Loan With Confidence
If you put these tips to improve your credit score into practice, you can raise your credit score in no time. You’ll be able to apply for a mortgage with confidence, knowing that your credit is in good shape. T&I Credit Union can help you with your mortgage loan application. Contact a loan manager today.