Here’s one that I know my friends in the mortgage industry can get behind. There’s no more important time to work on your credit score than when you’re about to apply for a mortgage. There was once a time when if you could fog a mirror, you could get a loan (hello 2006!) but those days are long behind us. Now if you want to apply for a home loan, there are lots of qualifications. Having good credit is right at the top of that list. The higher your credit score, the lower the down payment you need to qualify, and likely the lower your interest rate. Improving your credit can save you a ton of money—we’re talking about thousands of dollars over the life of the loan. Here are the actions you can take that will have a notable impact on your score:
Pay down your credit card balances
Credit utilization is one of the biggest factors in determining your credit score. Your credit utilization should at least be less than 30 percent of your limit, and it’s even better if you can get it below 15 percent. This rule applies to both individual cards and your overall credit limit.
It may even be worthwhile to use some of the cash funds you were planning to use for a down payment to pay off credit card balances. Speak to your mortgage lender about the best avenues to take to ensure you’re getting the best loan possible!
Do no harm
Possibly the most important item on this list! While you certainly want to improve your score if possible, at the very least you’ll want to keep it steady. Avoid opening new lines of credit if you’re applying for a mortgage in the very near future. This will cause a hard inquiry to show up on your credit report. Whatever you do, don’t go car shopping or start furnishing your new home before the closing date! Otherwise your lender and Realtor® will be none too happy with you!
Take care of negative items
It’s good practice to check your credit report for negative items a few times a year—you can get one free report from each of the three major bureaus (Experian, Equifax, and TransUnion) per year. Sites like Creditkarma.com are great for keeping track of your credit scores for free as well.
If you find any negative items (collections, late payments, etc.), write a letter to the original creditor. Explain the circumstances that led to the negative item, and request that it be removed from your report. It can be surprisingly effective, and removing a negative item will improve your credit score in a hurry. You can find some good templates for a request letter online.
Once your credit is in order, your lender will be able to get you pre-approved for a loan amount. Make sure you get pre-approved before you start house hunting, or else you might fall in love with a home outside your budget!
Got any other credit tips? Leave them in the comments!