Boost your credit score before applying for a mortgageby Tim Manni
Too often, mortgage borrowers are rejected for a home loan on the basis of poor credit. Whether you’re in the market for a purchase-money mortgage, a refinance or even a home equity loan, coming to a lender with a strong credit score–especially in this present environment–will truly increase your chances of success.
Today, one-third of the American population has a credit score below 620. Unfortunately, a credit score of 620 isn’t going to get you anywhere, even with those loan programs which claim your credit score isn’t much of a concern.
While the FHA says that there isn’t a minimum credit score to gain their approval, “Lenders on the other hand, will not make FHA loans to applicants whose credit scores are below 640,” explains loan officer and HSH.com contributing writer Dan Green.
“So, even though the FHA has no credit-score requirement, lenders do. As such, applicants with low credit scores are often denied FHA financing.”
Here’s how to improve your score
As I said, don’t wait for a lender to tell you your score isn’t high enough, work to improve your score before you apply for a home loan. According to HSH.com contributor Alexandra Kay, there are five ways borrowers can improve their score prior to submitting an application:
1. Get credit savvy
Think about how your financial behavior affects your credit score. Do you carry a balance on your credit cards? If so, that hurts your score in terms of amounts owed. If you open too many new lines of credit, mortgage lenders will see you as desperate. Making late payments causes creditors to think you’re insolvent. These are all things that will drop your credit score.
Check your status
“You’ll want to review your credit reports six months or more before a large credit event like applying for a mortgage,” says Gumbinger. It can take quite some time to clear up any errors or solve legitimate disputes, and you want those things off your report when you fill out mortgage applications.
Even if you’re not in the market for a mortgage, you’ll still want to review your credit reports at least once each year. You’re entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) each year. Stagger receiving the reports, and you’ll have a credit update once every four months. You can access your free reports at www.annualcreditreport.com.
Pay on time
“Be extra careful to make each [of] your minimum payments on time each month,” says Barry Paperno, product support manager for FICO, inventor of the FICO score. “If you’re late making payments now, bring them current immediately and keep them current.” Your payment history makes up the largest part of your credit score (35 percent), and it takes longer to raise your score after late payments than it does for some other issues.
Pay down debt
Since the FICO formula looks at your credit card limits and balances, both individually and in total, shifting balances around won’t make your bottom line look any better. Instead, you’ll want to pay down balances while continuing to use the cards, says Paperno. Ideally, you’ll want to aim for a utilization percentage, both individually and in total, of under 10 percent. That means you’re using less than 10 percent of available credit on any one of your cards.
Don’t close accounts
Length of credit history is another important part of your credit score, so closing old accounts could actually hurt you. That’s because potential mortgage lenders want to know you’ve been responsible with credit for a good long time. Keep older accounts active by making small charges on each one at least every few months and then paying those charges off right away, advises Paperno. “Using your cards regularly keeps them active, which ensures that your credit limits on these cards continue to be open and included in your credit utilization. Contrary to popular belief, you won’t be penalized for having lots of available credit.