Make sure you qualify before you try to buy
Before you begin shopping for your dream home or apply for a mortgage loan, you should take time to review and begin repairing your credit score. Your credit score affects everything from your interest rate to the decision to approve or deny your loan. The higher your credit score, the more leverage you have to negotiate better rates and terms for your mortgage loan. Here are a few steps you can take to begin improving your credit before applying for a home loan.
Check your credit score
Your credit score will be the most important factor in your mortgage loan process. The first step you’ll need to take is to get a personal copy of your credit report.
While various websites offer your compilation score, you should access your report directly through the three major credit reporting agencies: Equifax, Experian, and TransUnion. Since not all creditors report to all three agencies, pulling your individual reports will allow you to get a clear picture of your credit history. If you haven’t accessed your credit report in the last year, you are entitled to a free copy from all three agencies.
Next, you’ll want to check every single item on each report, verifying the accuracy of all information. You are likely to find at least one error on your credit report. Typically, these are simple mistakes like transposed numbers, but they can drag your credit score down significantly. Worse, such errors could be warning signs of identity theft that you will want to address before moving forward in the home buying process. When you discover errors, you will want to address these via certified mail, and be sure to keep careful notes and copies of every correspondence or phone conversation. Credit agencies have 30 days to respond to any disputes from individuals and must be able to verify the information that you are disputing or else remove it from your report.
Get current and stay current
The most sure-fire way to keep a high credit rating is to make all payments on time. Missing even one payment can drag down your score. If you have any outstanding late payments, you’ll want to make sure that you bring your balance current as soon as possible.
Paying bills on time is the most important factor in a credit score, so getting and staying current on your payments can start to improve your credit score in as little as one to two months. If you are less than 30 days late on a payment and you are able to make a payment today, then do it. Creditors typically report late payments after the 30-day mark.
Now is a good time to create a monthly budget for your household, if you have not already done so. Be sure to include the minimum payment, amount you expect to pay, balance updates, and due dates. Consider creating recurring reminders of bill due dates on your phone or computer so that you don’t forget to send a payment on time.
Pay down balances
Paying down your existing revolving credit balance is a great way to increase your credit score quickly. Credit utilization, or your credit limit compared to the amount you have used, accounts for an average of 30% of your credit score. The more credit you have but have not used, the better.
Paying above the minimum monthly balance will not only help you pay down your balances faster but will also save you money in the long run on the total amount of interest paid. Rank all of your existing debt by interest rate. Pay off the debts with the highest interest rates first, as these are the costliest in the long run. Apply any non-recurring income, like birthday money, income tax refunds, garage sales funds, or similar, you receive to your debts. This is bonus money that is not part of your regular income, so should be applied to help you keep as much of your monthly income in savings as possible.
As you pay off debts, there are a lot of questions about whether you should close the accounts. While there is great debate about the topic, keeping them open may show lenders that you are responsible with debt by not utilizing all of the credit you have available to you.
Don’t take on new debt
While it may seem obvious, you should not take on any new debt prior to or during the mortgage loan qualifying process. These new loans will show up as a hard inquiry on your credit report, showing your potential mortgage lender that you’re seeking out new credit.
It’s best to avoid any major changes to your finances before purchasing a home. You will be taking on a great responsibility and hefty monthly payment with your mortgage and you should not put that at risk by buying a new car or paying for an expensive vacation with your credit card during the process.
Your credit score is your most valuable asset when applying for a mortgage loan. Protecting and building it up is a significant step that can help you get approved for the home of your dreams at a rate that makes your wallet happy.
What steps did you take to help you qualify for your mortgage? Leave us a comment below and tell us about your experience.
EXIT Realty Bob Lamb & Associates is Murfreesboro’s most innovative real estate team.
EXIT Realty Bob Lamb & Associates
2630 Memorial Blvd, Murfreesboro, TN 37129