How to Improve Your Credit for a Home Loan

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Improving Your Credit Score

To get the best mortgage interest rate, you will need to have good credit. If your credit is not so good, cleaning up your credit report and increasing your credit score will greatly improve your chances of getting a good rate for a home loan. If your credit score is already good, you will need to maintain it.

 

Check Your Credit Report

There are three things a mortgage lender will look for when you apply for a home loan.

  1. You (and your spouse) have steady income.
  2. How much are you able to put down.
  3. Do you have a good solid credit history

You can check your credit report by requesting a report from one the three credit reporting bureaus: Experian, TransUnion, and Equifax. Federal law allows you to request one free credit report each year from each agency. You can do this by visiting annualcreditreport.com

 

Check Your FICO Score

Your FICO score can affect the interest rate on your loan. The lower the score, the higher your rate which can possibly cost you tens of thousands of dollars over the life of your loan.

In addition to your credit report, you can order your FICO scores from myFICO.com to get an idea of where your credit stands. You can also be able to see your scores from other sources such as credit card companies.

 

Dispute Inaccurate Information

Once you have your credit report, search it for any errors. Any errors or incorrect information can hurt your credit score and may cause your home loan to be denied. If any errors or incorrect information is found you can dispute it with the credit bureau. Providing documentation to support your claim of the error or incorrect information will help ensure it is removed from your report.

 

Pay Off Delinquent Accounts

Delinquent accounts are any late accounts, bills in collection, charge-offs, or judgments. If any of these accounts show up on your credit report, this will severely harm your chances of getting a mortgage. These accounts affect the payment history section of your credit score, which is the largest component of your score. You will need to start paying off and repairing these accounts.

 

Timely Payments Help Bury Delinquencies

Did you know that late payments can stay on your credit history for a whopping seven years? The damage to your credit is the worst when they first occur. If you have made a late payment, or just paid off your delinquencies, wait at least six months before applying for a mortgage. Six months of on-time payments can help your credit score start to build back up again.

 

Reducing Your Debt-To-Income Ratio

Your bank will look at your debt relative to your income. This is known as your debt-to-income ratio. This will compare the amount of money you have going out for debt to the money you have coming in (your income). Your bank and lender will want to see this ratio as low as possible. You will need to speak to your bank and lender to see what ratios they require to qualify for a mortgage.

There are a couple different ways to reduce your debt-to-income ratio. You can either increase your income, or the easier way is to pay down any outstanding debt you currently have. 

 

Don’t Incur Any New Debt

Don’t take on any new debt even if your debt-to-income ratio stays low. This includes applying for anything that can affect your credit score like credit cards, auto loans, or personal loans. You will also need to make sure you are not making any large purchases that can increase your debt. If you have any questions, always contact your mortgage lender first.

 

If you have any questions about the home buying or selling process, reach out to any of our knowledgeable NextHome TriState Realty agents. 712-224-6398