How to Improve Your Credit Score Before Applying for a Mortgage

When it comes to purchasing a home, your credit score is critical to your ability to get a mortgage. It not only helps decide whether you’ll get approved but also at what interest rate, which might affect the types of loans available to you and even how much you’ll pay over the life of your loan.

The good news? Your credit score isn’t written in stone. But you can improve — and get yourself in position for good mortgage terms. Here’s a handy guide to raising your credit score before you apply for a mortgage.

1. Check Your Credit Report

Step one is finding out where you are. Ask for a free copy of your credit report from the three leading credit bureaus: Equifax, Experian and TransUnion. Review it carefully for:

• Errors in account balances
• Incorrect late payment records
• Accounts that are not yours

Challenging errors and getting them corrected can provide a fast improvement to your score.

2. Pay Bills on Time, Every Time

Your payment history accounts for 35 percent of your credit score — by far the most significant factor. It only takes a single late payment to devastate your score.

• Autopay recurring bills.
• Set calendar reminders to prevent missed due dates.
• If you’ve fallen behind in the past, work on making consistent, on-time payments moving forward.

Lenders are looking for a history of financial responsibility, so every on-time payment helps.

3. Lower Your Credit Utilization Ratio

About 30% of your score is based on what’s known as your credit utilization ratio — the percent of available credit you use. A lower ratio tells lenders that you are credit-fiscally responsible.

• Try to keep your balances below 30 percent of the limit (preferably under 10 percent).
• Pay down high-interest credit cards before others.
• You might also think about making more than one payment per month, even if it’s less each time, to whittle down balances faster.

For instance, if you have a credit limit of $10,000 and a balance of $4,000, your utilization is 40%. Paying it down to $2,000 drops utilization to 20%, which might help increase your score.

4. Avoid Opening New Credit Accounts

Any time you apply for new credit — whether it’s in the form of a credit card or loan — a hard inquiry is made and your score goes down slightly, on a temporary basis. Lenders are going to get suspicious if they have several inquiries in a short amount of time.

Don’t do these things before applying for a mortgage:

• Opening new credit cards
• Paying for big-ticket items (such as a car)
• Taking out personal loans

CULTIVATE: Instead, focus on growing what you have.

5. Don’t Close Old Accounts

Your length of credit history accounts for 15% of your credit score. Closing old credit cards can reduce your available credit and shorten your credit history — two things that might ding your score.

Instead:

• Maintain older accounts, even ones that seldom see activity.
• Make a small purchase every now and then to keep the card active.

This is indicative of gorilla hair, a long-term credit responsible.

6. Pay Off Outstanding Debts

Also, high debt can be damaging to your credit score and can drive up your debt-to-income ratio (DTI) — an important calculation for lenders considering mortgages.

• Concentrate on paying down high-interest credit card balances.
• If it makes sense, think about consolidating debt into a lower-interest loan.
• Don’t carry balances on more than one account.

The less you owe, the better your credit score and mortgage terms.

7. You should “harden” your credit score, not soften it

In the months before you apply for a mortgage, do your best to:

• Avoid late or missed payments.
• Keep credit card balances low.
• Avoid making significant financial changes, including changing jobs or taking on new debt.

Borrowers should be steady and stable; that’s what lenders like to see.

8. Give Yourself Time

(You don’t fix your credit score overnight.) While some changes (such as fixing errors) might make a difference within weeks, most improvements take three to six months or longer. The sooner you start, the better situated you will be when it comes time to apply.

Your credit score is one of the most valuable things that can help you get great mortgage rates. By reviewing your report, paying bills on time, reducing debt and not applying for new credit, you can see a big change in your score and your chances of getting approved.

Here at Monalending, we help educate buyers on the mortgage process and that includes knowledge about how a credit score will impact your options. Whether you are ready to purchase today, or preparing for tomorrow, our staff is here to assist you on charting the right path.

Thinking about homeownership? Chat to Monalending today to discuss your mortgage needs and tailor a solution based on your financial situation.