Sure, you’ve saved up for a down payment on a new house, but if you have average credit, you may have a hard time qualifying for a mortgage and buying the home of your dreams. The good news is, you can do a lot to improve your score before you apply. With these tips, you’ll have a much better chance of getting approved and locking in an affordable interest rate.
If you’re up to your ears in credit card debt, lenders will probably think twice before offering you a mortgage because both your credit utilization ratio and your debt-to-income ratio will be high. That’s why it’s a smart idea to start paying off those balances before sending out mortgage applications.
Make more than the minimum payments on your cards each month. Not only will this boost your credit score and lower your overall debt load, but it will also save you money on interest and show potential lenders that you’re serious about repaying what you borrowed.
Mistakes happen. And when they do, you don’t want to be the last person to know about them. Get free credit reports online from the three major credit bureaus, TransUnion, Equifax and Experian, and go through them line by line, checking for inaccuracies. If you come across an error, file a dispute as soon as possible.
Both Equifax and Experian have online dispute forms you can complete, and TransUnion has a form you can fill out and mail in. After submitting these forms, the credit bureau will contact the source, and the claim will be investigated within 30 days. You also have the option of sending a letter of dispute directly to the credit reporting companies with copies of supporting documentation. Remember to send these via certified mail to ensure the company receives your dispute.
If you’re moving into a new house, you may also be interested in getting a new car for your driveway and furniture to fill your rooms, but hold off on applying for new credit cards and auto loans until you’ve locked down that mortgage. You want your credit report to look as clean as possible when you send in your application, and many new inquiries may raise red flags for lenders.
Nerd note: While delaying the credit card applications could be a good call, it’s generally not a good idea to close all your paid-off cards at the same time. If you do this, your credit utilization ratio may go up and your credit history may appear shorter and less varied, which could also hurt your score. Instead, plan on keeping your accounts open, at least until your mortgage is approved.
Shop around for a mortgage with the best rates, but don’t let your search drag on. After about a month, your FICO score may start reflecting your applications as separate inquiries, which could ding your credit score. This could potentially be an even bigger problem if your lender uses the less common VantageScore or an older version of the FICO score, which consider mortgage applications as separate inquiries if they’re not within two weeks of each other. To stay on the safe side, keep your search focused and brief.
If possible, get pre-approved for a mortgage before even shopping for a house, so that if you do find the home of your dreams, you won’t have to worry about getting approved for a loan later.
You’re focused on getting a mortgage now, but remember to protect your credit score after you’ve been approved. Once you make your down payment on your new house, your savings may take a hit and you may feel tempted to start relying on credit more heavily. In the short term, that may be OK, but making it a long-term habit could do some serious damage to your credit score.
If your savings account is dwindling, consider cutting back on fixed expenses and work toward saving six months’ worth of living expenses. This way, in case of an emergency, you won’t have to use your credit card as a crutch. By protecting your credit score, you’ll also have an easier time applying for mortgages and other credit lines down the road.original post: www.nerdwallet.com
It's important to note that repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast. The best advice for rebuilding credit is to manage it responsibly over time. If you haven't done that, then you need to repair your credit history before you see credit score improvement. The tips below will help you do that. They are divided up into categories based on the data used to calculate your credit score.
Contributing 35% to a FICO Score calculation, this category has the greatest effect on improving your scores, but past problems like missed or late payments are not easily fixed.
This category contributes 30% to a FICO Score's calculation and can be easier to clean up than payment history, but that requires financial discipline and understanding the tips below.
To summarize, "fixing" a credit score is more about fixing errors in your credit history (if they exist) and then following the guidelines above to maintain consistent, good credit history. Raising your scores after a poor mark on your report or building credit for the first time will take patience and discipline.
Building your credit can help tremendously when trying to purchase a home. While we at Allegiant Home Loans do go down to a 580 FHA, it is always good to keep a high credit score. Here are some reasons why your credit is so important when it comes to making such a large purchase.
Your credit history determines what loans you will qualify for and the interest rate you will pay. Lenders get your credit history by obtaining your credit score.
You’ll most likely need to borrow funds from a lender. This is why credit is such an important component to the home buying process.
A credit score provides an easy way for lenders to numerically judge your credit at a point in time. It gauges how likely you are to repay your loan in a timely manner. The better your history appears, the more attractive you become as a loan customer.
Absolutely not. Lenders aren’t looking for consumers with “perfect credit.” If you feel you’re ready for homeownership, you may be continuing to rent unnecessarily instead of building equity in the home of your dreams. And the longer you put off buying a home, the longer it will take to build equity. It’s easy to apply for a loan. We have expert advice aimed specifically at first-time homebuyers.
There are several different ways you can improve your credit score. One way is through credit counseling or debt management agencies. These are “non-profit” companies that provide several different types of services.
As with anything else in life, it’s nice to have someone guide us through the rough spots. That’s essentially what credit counseling is.
Credit counselors will work with both you and your lenders to find a fair resolution. Most lenders are willing to do this because they receive some of their owed money back in a timely fashion. As you improve your credit, your score will improve as well, which can widen your choice in homes.
Some people need outside help, others don’t. Here are a few things you can do:
Paying off your debts will generally improve your score within a few months. Keep this goal in mind and work toward it diligently.
Your credit score is a key determinant of the interest rates you’ll pay when borrowing money. Whether you have excellent, good, or poor credit, it’s important to monitor your credit situation.
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