6 Quick Ways To Boost Your Credit Score Before Applying For A Mortgage

Although you can buy a house with bad credit, the process is much easier when your credit rating is in good shape. And if you oscillate between fair and good credit, that could mean a difference of thousands of dollars in interest over the life of your loan.

So before you start your mortgage app, it is a good idea to increase your score as much as possible. Fortunately, there are several ways to improve your credit score in a matter of weeks.

What credit score is needed for a mortgage loan?

The credit score you need to qualify for a mortgage depends on the type of loan you are looking for. FHA loans, for example, only require a credit score of 500 to qualify, although you must file at least 10% as deposit and pay for private mortgage insurance. To deposit only 3.5%, a credit score of 580 is required.

“FHA loans come with additional costs like the mortgage insurance premium, so you’ll want to make sure that even if you’re approved for a loan, it’s still a wise move,” said Brian Walsh, Director of Financial Planning at SoFi.

But for conventional mortgages, he said, the minimum credit score required is in the mid-600s. analysis of Credit Karma members shows that the average credit score for first-time home buyers in the United States is 684, although the number varies by location, according to Dana Marineau, vice president of Credit Karma.

Even so, it is probably not enough to qualify for the best interest rates. To get the best loan terms, you’ll probably need a score of 720 or better.

Ways to Increase Your Credit Score Quickly

So what can you do to increase your score within a reasonable time frame? While it takes years of good credit to maintain good credit, there are some things you can do to boost your credit score before applying for a mortgage.

1. Dispose of credit report errors.

“You should start by getting a copy of your credit report and looking for errors,” Walsh said. “There may be errors on your credit report that could negatively impact your score. In fact, a report of the Federal Trade Commission found that one in five consumers had an error on at least one of their credit reports.

To review your credit reports for errors, start by visiting annualcreditreport.com. It is the only website licensed by the federal government to provide free credit reports. Check each report for errors such as incorrect name or address, credit lines that don’t belong to you, duplicate entries, incorrect account status, and other errors that could result in a lower score.

Since each credit bureau collects and reports credit information independently, you will need to check all three reports. If you find an error, you will also need to dispute it with each office. Each has a slightly different process for disputing errors, but instructions can easily be found on their websites.

2. Pay off debts.

Once you are sure that your credit reports are up to date and accurate, look for ways to reduce your debt load.

One of the main deciding factors when applying for a mortgage is your debt to income ratio. This number measures how much of your monthly income is spent on debt repayment.

“If you can pay off a loan, the monthly payment on that loan goes away, which improves your debt-to-income ratio,” said Justin Pritchard, chartered financial planner and owner of Financial Approach in Montrose, Colorado. “Lenders prefer that your total debt repayments be a relatively small portion of your total monthly income. Eliminating a payment can help you qualify for a loan.

Most mortgage lenders require a back-end DTI (the total amount of income allocated to the debt, including your potential mortgage payment) of no more than 43%. So by paying off a credit card balance or paying off your car loan, you will immediately lower your DTI and increase your chances of getting approved.

And while DTI doesn’t directly affect your credit score, outstanding debt repayment does. This is because “amounts owed,” also known as credit utilization rates, make up 30% of your FICO score. The more you borrow on your available credit, the more it can negatively affect your score. Again, by reducing your debt on your behalf, you become a much more attractive borrower.

3. Request a credit limit increase.

In addition to paying off your debt, another easy way to instantly improve your score is to get your credit limit increased. While this will not change your debt-to-income ratio, it will reduce your use of credit since your outstanding debt stays the same as your available credit increases.

Often times, you can request a raise and get approved instantly through your card company website. Sometimes, however, you will have to call and ask.

Keep in mind that sometimes credit card issuers will perform a credit check before granting a credit limit increase. This results in a serious investigation of your credit report, although a single investigation has negligible impact. And if your credit has taken a hit since you first opened your credit card account, your issuer might actually inferior your limit instead.

4. Be added as an authorized user.

Another way to instantly improve your credit is to piggyback on someone else’s. If you have a family member or close friend with excellent credit, you can ask them to add you as an authorized user on one of their credit cards.

When someone adds an authorized user to a credit card, that account’s information is reported in both people’s credit reports. If you are added to an account with a long and clean history, it may raise your score a bit higher. The best part is that you don’t need to use the credit card or even know the card information. The activity of the primary account holder will also be automatically transferred to you.

Credit bureaus don’t place as much weight on authorized user status as they do on primary cardholder status. Yet every little bit counts. Just keep in mind that you will have to share both the good and the bad of this account. If the primary cardholder misses a payment or maximizes the card, you will also suffer the consequences.

5. Consider a home builder loan.

If you have limited experience with different types of credit, a homebuilder loan can help you diversify your credit mix – which is 15% of your FICO score – and boost your score a bit.

“These small loans, which are typically less than $ 1,000, aren’t loans at all, at least not in the traditional sense,” said Marineau, vice president of Credit Karma. “The financial institution deposits the loan amount into a locked savings account that you don’t have access to, and over the next six to 24 months you pay off the loan just like you would any other loan. . Once the loan is fully repaid, the accumulated money is returned to you in full.

If you’re worried about adding another credit check to your reports, the good news is that many lenders offering these loans (usually credit unions) don’t require a traditional credit check to qualify. Instead, they could assess your banking history through consumer information agency ChexSystems, according to Experiential.

6. Request a new quick score.

After you’ve done all the hard work to clean up your credit, you’ll want your credit scores to reflect that. This is where a new quick scoring can help.

“You may be able to use a new quick scoring to update your credit reports quickly (in about a week) and receive a more favorable rating,” Pritchard said. This is much faster than the weeks or months it takes for credit changes to be reflected in your score normally. “Not all lenders offer this, but if it’s available and it helps, go ahead and use it.”

Other tips for keeping your credit in good condition

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As you work on improving your credit before you buy a home, there are a few mistakes you should avoid so that your progress isn’t reversed.

Don’t miss any payments: The worst thing you can do for your credit is pay a late bill. Payment history represents 35% of your FICO score, the most weighted factor.

Do not apply for new credit: Until you’ve locked your mortgage, avoid chasing sign-up bonuses and enticing reward offers. If a lender sees multiple credit applications leading up to your mortgage application, that will be a red flag that you are too dependent on credit.

Make your fare purchases over a two-week period: Having said that, you will need to shop around and get quotes from different mortgage lenders. Fortunately, credit bureaus recognize that finding rates is a natural part of the mortgage process. “Just make sure you shop within a short period of time, as the inquiries made in a certain window are grouped together,” said Walsh, head of financial planning at SoFi. “This window is between 14 and 45 days depending on the model used, so plan to shop within two weeks to be on the safe side.”

Keep credit card balances as low as possible: Even if you plan to pay off the entire balance when your bill arrives, there’s a good chance your balance will be reported to the credit bureaus in the middle of the month, making it look like you’re using a lot of credit. “Even if you pay off your credit cards every month, you need to keep your balances particularly low when you apply for a mortgage,” Pritchard said. “When they withdraw your credit, they get a snapshot of your account balances, and it might be the day before you paid your balance.” A good rule of thumb is to keep your balance below 30% of your credit limit, even if the lower the better. “If that means paying off your credit card every week while you’re in the application process, it’s probably worth it,” he said.

Do not close accounts: It might seem counterintuitive, but you should avoid closing revolving credit accounts like credit cards, even if you aren’t using them. Closing an account immediately reduces your available credit. If you have unpaid debts, your credit utilization rate will increase. Your best bet is to avoid making major changes until you sign your mortgage contract.

About Dora Kohler

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