Buying your dream house is exciting, but the mortgage process can be overwhelming. One of the most critical parts of the home-buying process is assessing your credit score.
Your credit score is critical in determining whether a mortgage lender will approve your loan application. Therefore, the higher your credit score is, the better your chances of getting approved for a mortgage.
This article will discuss how to prepare for a mortgage by giving you insider tips on improving your credit score before applying and making the home equity loan process go smoothly.
Check Your Credit Report
Before you apply for a mortgage, you should obtain a copy of your credit report from all credit bureaus. You can get one free credit report each year from each reporting agency—Equifax, Experian, and TransUnion.
Review your report carefully and look for any mistakes or discrepancies. If you find errors, dispute them with the credit bureau reporting the error. Disputed items are legally removed from your credit report, improving your score.
Pay Down Outstanding Debts
Lenders use your debt-to-income ratio (DTI) to determine how much money you can borrow for a mortgage. Therefore, if you have outstanding debts, consider paying them down before applying for a mortgage.
Paying your outstanding debts reduces your DTI and improves your credit score. Doing so shows future lenders that you’re responsible and capable of making timely payments.
Avoid Applying For New Credit
Every time you apply for new credit, it creates an inquiry on your credit report. Too many landscape inquiries in a short period can negatively impact your credit score.
Therefore, it’s essential to avoid applying for new credit cards, a bad credit loan, or other types of credit before applying for a mortgage. Instead, focus on paying down your debt and keeping your credit utilization low.
Keep Credit Utilization Low
Another essential factor in your credit score is your credit utilization. Most importantly, it’s the amount of credit you have relative to what you’re borrowing.
Generally, keeping your credit utilization at 30% or lower is best. The lower your credit utilization, the better your credit score. It’s also essential to monitor your credit utilization ratios for all credit accounts, primarily if you have several cards with balances.
Make Payments On Time
It’s crucial to make all your payments on time. Late payments negatively impact your credit score, and a history of late payments can be a red flag to a lender.
Therefore, pay on or before the due date to avoid costly late fees and penalties. Automatic payments can be a great way to ensure you never miss a payment.
Don’t Close Old Credit Accounts
While paying down your debts, avoid closing any old credit accounts. This may seem like a good idea, but closing accounts can lower your credit score.
The length of your credit history is an important factor in your overall credit score, so older accounts can help boost your score.
Build Up Your Savings
Save enough money to put down as a down payment on your new home. Saving up for a down payment will improve your credit score and show lenders that you’re financially responsible.
Putting down 20% of the total home price is ideal, but less can qualify for many mortgage types. Having substantial savings also indicates to lenders that you can manage your finances and meet your financial obligations.
Your credit score is a critical factor in obtaining approval for a mortgage. Therefore, preparing yourself by following the steps outlined above is essential to improve your credit score.
Ensuring your credit report is accurate, paying your outstanding debts, avoiding applying for new credit, keeping your credit utilization low, and making timely payments are all essential factors in improving your credit score.
By taking these steps, you can acquire a 720 credit score or higher, qualifying you for the best mortgage rates. We hope these tips help you in your journey to homeownership. Good luck!