Your credit report plays a major role in your ability to qualify for a mortgage. While most lenders like to see scores in the 700-range, it is still possible to qualify for a home loan with lower scores. However, those loans may come with higher interest rates. To ensure you’re able to qualify for the best loan at the best rate, it’s essential to take your credit seriously. In today’s post, we’ll discuss 5 ways you can prepare your credit for getting a mortgage.
1.) Review Your Credit Report
At least six months before you plan to apply for a home loan, get a copy of your credit report and review it carefully. If you have late payments or other derogatory items on your report, you’ll have enough time to clear these things up. If you typically pay your bills on time and don’t have any unexpected surprises, you’re in great shape.
You are entitled to a free copy once per year from each of the three major credit bureaus. Getting the copies is easy, but you’ll need to understand what you’re looking at and how different items affect your overall score. Read our post, “A Common Sense Look at Your Credit Score” for more information.
2.) Dispute Innacuracies
It’s not altogether uncommon for people to find errors on their credit report. If you discover an inaccuracy, take the necessary steps to dispute it. Again, it pays to be proactive. As long as you don’t wait until the last minute, you should have enough time to find and correct any mistakes on your report before applying for mortgage financing.
3.) Leave Older Accounts Open and Use Them Occasionally
Don’t be tempted to close or cancel older lines of credit that you no longer use. Your credit score can actually benefit from having these accounts, as they help contribute to your available credit. It may also be a good idea to use these accounts every once in a while to keep the tradelines active. Mortgage lenders typically like to see at least 2-3 active tradelines (any combination of credit cards, student loans, auto loans, etc. that signify your ability to handle credit).
4.) Avoid New Credit Accounts
Once you get closer to your anticipated mortgage application date, avoid getting any new lines of credit as this can temporarily lower your score. A good rule of thumb is to avoid opening new credit accounts at least six months before you apply for a mortgage.
5.) Avoid Spending on Credit
This rule applies more once you actually begin the mortgage process. Once you have a mortgage and are in escrow, you may be tempted to put a lot of purchases on your credit cards. New furniture, home improvement expenses, moving costs, etc. can add up quickly and can increase your debt utilization ratio, a figure that could have an impact on your ability to finalize your loan. If your debt utilization ratio rises above 30% before closing on a home purchase, you could potentially disqualify for a mortgage.
For more information on keeping your credit healthy, take a look at these related articles:
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