Here are ways to improve your credit score before you start shopping for a new home.
Why is your credit score so important? Not only do mortgage lenders verify a buyer’s savings, income and expenses, they pull the personal credit score of each loan applicant from the three credit reporting bureaus. Lenders do this to manage the risk they carry when they place trust a borrower to pay them back. Lenders want see that each borrower has an established history of paying several creditors faithfully and on time every month.
Major lenders are looking for minimum personal credit scores above 620. Borrower’s will find that earning a credit score above 740 is worth the extra effort since very good-to-excellent credit scores are rewarded with lower interest rates. Imagine having $100-200 of your monthly payment allocated to buying more house rather than paying more interest! Get ready to reap the rewards of being a low-risk borrower.
If your credit score is carrying a few dings, don’t worry. Just follow these steps to bring back the shine to your buying power. It takes a little time so it’s a good idea to get started right away.
Pull Your Credit Report
There are three major U.S. credit bureaus (Experian, Equifax, and TransUnion), and each releases its own credit scores and reports (a more detailed history that’s used to determine your score). Their scores should be roughly equivalent, although they do pull from different sources. For example, Experian considers on-time rent payments while TransUnion has detailed information about previous employers.
To access your scores, I recommend using AnnualCreditReport.com. You can also get a free copy of your report every 12 months from each credit-reporting company. These reports do not include your credit score, though—you’ll have to go to each company for that, and pay a small fee to get the score.
Another option is to check with your credit card company: Many credit card companies now offer free access to your credit scores and reports, which are updated monthly. Once you’ve got your report in hand, review it page by page for accuracy. Carefully assess the “adverse accounts” section that details late payments and other slip-ups.
Find Out Where You Stand
The better your credit score, the better opportunity you will have to seal the deal on a home mortgage.
- The Federal Housing Administration requires a minimum credit score of 580 to allow a 3.5% down payment.
- Major lenders often require at least 620 and often higher score.
- Credit scores over 720 compete for lower interest rates!
A 2013 Federal Trade Commission study found that 5% of credit reports contain errors that can erroneously ding your score. If you spot any errors on your report take the following steps:
- Send a letter to the bureau to dispute the error on your report. Provide as much documentation as possible, per FTC guidelines.
- Contact the organization that submitted the error. Ask them to update the inaccurate information they reported about you with the bureau. Be prepared to provide sufficient documentation make your case.
- Within weeks your credit history should reflect the corrections and your efforts should be rewarded with a bump in your overall score.
Erase Small Mistakes
So you’ve made a late payment or two—who hasn’t? Here are some ways you may be able to improve your score.
- Call the company that registered a late payment to you record and ask if it can be removed from your record.
This won’t work if you have a history of late payments. However, if you only if you have one or two small accidents or errors on your record, it’s worth a phone call or two.
Increase Your Credit Limits
The very best way to improve your credit score is to pay off your debt. If that isn’t an option for you right now, take this step instead.
- Ask your credit card companies to increase your credit limit. This will improve your very important debt-to-ratio assessment, which compares how much you owe to how much you can borrow.
- Aim to get your balances below 20% of your total credit line. (That’s a $1,000 balance on a card with a $5,000 limit) This ratio shines the light on your responsible borrowing practices, and it will raise your credit score.
Get Your Accounts In Order
Having too many credit lines extended to you is considered by lenders and the credit bureaus as risky. It may even lower the amount you can borrow for a home loan.
Here are a few more tips regarding credit usage and accounts that can follow to raise your credit score.
- Payoff credit accounts, but do not close them until you have a lender consultation. Consider setting up an appointment with Nickie Sjogren at Caliber Home Loans for a personalized credit review before you pull your credit for a loan pre-approval.
- Maintain your primary bank accounts and credit card accounts for the long-term. The length of account ownership is factored as a positive into your score.
- Lenders like to see borrower profiles with three to four active credit lines. Each account should have an on-time payment record for one year or longer.
- An example would be an individual with two major credit cards accounts, one store credit card account and a car loan.
- Being late on a student loan payment will significantly damage your credit score! Make those payments or reorganize those loans to make them more manageable. Do not ignore them.
Pay Your Bills on Time
If you are often late making payments, now is the time to make a change in habits. Here are several ways you can ensure late payments are a thing of the past.
- Commit to using automatic payments or bank bill pay. Your bank or credit union branch will help you get started if you need assistance.
- Call your billers and make monthly payment arrangements to make large bills more manageable.
- Download a banking application for your phone and set up notifications so you stay informed about your account balances, transactions, and bill payments in real time.
- Get your incoming and outgoing mail organized where you will see it every day. Keep track of bills the day they come in so they aren’t forgotten or misplaced.
- Set reminders on your phone.
Paying your bills on time is where you have the most power to improve your credit score.
Improving your credit score takes time. Unfortunately, negative items (such as those habitually late or nonexistent payments) can stay on your report for up to seven years. Here’s the good news. Changing your habits makes a big difference in the “payment history” segment of your report, which accounts for 35% of your score.
Follow these steps, and in time, your credit score will enable you to qualify for a home loan.
Save for a Down Payment
Now you’re ready to start thinking about the next step in your path to homeownership – saving for a down payment.