As you might be aware, having a good credit score can make all the difference when applying for a mortgage. As a rule of thumb, the lower your credit score, the more likely it is that you will pay a higher interest rate and in turn pay more for the property you are looking to buy. Cleaning up your credit report is the single most productive step you can take prior to buying a home. Even if your credit score is good, it’s vitally important that you maintain it to secure a low interest rate. Here are some simple steps you can take to improve and manage your credit score.
Examine your credit report
While your credit score is normally accurate there can be instances where there is misinformation on your report. This will hurt your credit score and could make all the difference when applying for a loan. Be sure to contact the credit bureau if you see anything that looks inaccurate. Be sure you can provide proof of the mistake. This will be necessary in order to resolve inaccuracies and clear your credit.
When you complete a loan application, the mortgage lender will want to look at three main parts of your finance. Your recurring income, the amount you have for your down payment and your credit history. It is important to check all three credit reports as you don’t always know which one will be checked by the bank. You can get a free copy of all three reports at annualcreditreport.com.
Delinquent accounts can include bills in collection, judgements, charge-offs & late accounts. Lenders will want to be sure that you can make payments in a timely manner without fail for the duration of your mortgage and will look at your payment history and current situation to determine the likelihood of your ability to make timely payments. Make no mistake, outstanding delinquent accounts will greatly deter mortgage lenders from giving you the loan you need to purchase your property. Make sure to pay off all your outstanding accounts before completing your loan application.
What lenders will be interested to see is an established payment plan with timely payments. If you have a recent late payment or something similar, wait at least 6 months before applying for a mortgage. The older the delinquency, the better your credit report will look.
Debt to income ratio
When applying for a mortgage you have to expect the underwriter to question your ability to make mortgage payments if you have a significant level of debt relative to your income. A general rule we find to be effective is to keep your debt to income ratio to below 12%. The lower you can get this ratio the better and the less you will pay over the duration of your loan for your property. Don’t forget, your debt to income ratio will go through the roof when your mortgage is approved. Calculate what this will be with a mortgage and try to keep it under 43% of your income.
To get an idea of where your credit stands, be sure to order your Equifax and TransUnion FICO scores from myFICO.com To get a good interest rate on your loan, you should have a score of at least 720. If like many people, your score is less than 720, read through the analysis and find ways to increase your score. Although Experian is used by lenders, they no longer approve mortgages based off your Experian credit report data. The best approach we have found is to buy a three in one credit score from Equifax or TransUnion.
Don’t create any new debt
Looking to buy a new TV? Looking to book that once in a lifetime vacation? Make sure you have the funds to do so! Adding more debt will make mortgage lenders suspicious of your financial stability and will certainly affect your credit score even if you can make the repayments on time. Even if your debt to income ratio remains under 12%, it really is best to stay away from credit-based transactions until you close escrow on your real estate purchase. Always remember, credit enquiries affect your credit score so the less you ask for the better.