Feb 3, 2023

Ways to Improve Your Credit Score for a Home Loan

Are you thinking of purchasing the house of your dreams? This blog discusses the importance of your credit score when purchasing a home and offers tips on how to boost your score in order to qualify for the most favorable interest rates.

Ways to Improve Your Credit for a Home Loan

It's crucial to get your credit in order for the loan application in order to get the best mortgage interest rate. Your chances of being approved for a house loan will increase if you improve your credit score and clean up your credit report. Maintaining good credit is essential to securing a low interest rate if your credit is already good.

Find out the best strategy to improve your credit so you can get a mortgage.

First things first, how do you get a mortgage?

A mortgage is a kind of loan that is used to buy a house. Buyers can spread their payments out over a set number of years and pay an agreed-upon amount of interest with a mortgage loan. The process usually takes six or seven weeks, from the time you're approved to the time you get the money and close on the house.

Since a home is usually the biggest thing a person buys, a mortgage is usually the biggest debt a family has. Getting the best possible loan terms can add or take away hundreds of dollars from your budget each month and tens of thousands of dollars over the life of the loan. Preparing for the mortgage application process is important if you want to get the best rate and most affordable monthly payments.

Here are some quick things to do to get ready for a mortgage:

  • Improve your credit.
  • Find out how much house you can afford based on your budget.
  • Save money for a down payment and the monthly mortgage payments.
  • Find out what kind of mortgage is best for you.
  • Compare current mortgage rates
  • Choose the right bank.
  • Get pre approved
  • Look at more than one house that fits your budget.
  • Try to get a mortgage and get it approved.
  • Close on your new house

Read more: 12 First-Time Home Buyer Tips You Should Know

Why do I need a good credit score for a mortgage?

When it comes to purchasing a home, your credit score is a very crucial factor to take into consideration because it reveals your financial history on how you've managed debt. If you have a high credit score, you will be able to apply for a mortgage with a reduced interest rate, which will make it easier and more inexpensive for you to purchase a home. Additionally, having a strong credit score is necessary in order to get qualified for a home loan.

What credit score do I need for a mortgage?

Lenders give their best rates to people with good credit scores, which are usually 740 or higher. But you don't have to have a perfect credit score to get a mortgage. The Federal Housing Administration, or FHA, has a minimum credit score requirement of 580 for loans it insures, but most lenders will want you to have a score of 620 or higher. (FHA loans have good rates, but the fees are very high. Work on getting your credit score above 740 to get the best deal. If you have poor or bad credit, you can still get a mortgage, but your interest rate and terms may not be as good.

Read more: How To Make My Credit Score Better?

Ways to Improve Your Credit for a Home Loan

As you can see your credit score is a big deal when it comes to mortgages. Let’s get into how you can improve your credit score for the best possible rate for your home loan.

1. Check your credit reports

The mortgage lender will look for three main things when you apply for a home loan. 

  1. Your income. It must be a steady income (your spouse as well if you apply together)
  2. Your down payment
  3. Your credit report

Your credit history shows lenders what kind of loans you've taken out and when you've paid them back. It also tells them if anything bad has happened to you, like a foreclosure or filing for bankruptcy. If you look at your credit report, you can see what lenders see. You'll be able to find out if something is hurting your credit score.

You can check your credit report by asking for copies from:

Since you don't know which credit reporting agency your bank will use to look at your credit history, you should get a report from all three.

Note: By going to annualcreditreport.com, you can get a free copy of your credit report from each of the three credit bureaus. Federal law says that you can get one free report from each agency each year.

2. Check your FICO score

You can get your FICO scores from myFICO.com in addition to your credit report to get a sense of how your credit is doing.

Your FICO score is a crucial consideration for your mortgage because it will have an impact on the interest you pay on your loan. Your mortgage's interest rate could change by 0.5% or more if your FICO score differs by 100 points, costing you tens of thousands of dollars over the course of the loan.

3. Look for any mistakes 

Check your credit history carefully to see if there are any mistakes. If you give the wrong information, it could hurt your credit score and cause your application to be turned down.

If you find wrong information, you should tell the credit bureau about it. Try to find proof to back up your claim. If you can show that the mistake was made, it will be easier for the mistake to be taken off your report.

4. Make your payments on time 

Although late payments can negatively impact your credit for seven years, they are most detrimental when they first happen.  Try to wait at least six months before applying for a mortgage if you just made a late payment or paid off certain delinquencies. The older payment will be able to drop farther down your record and appear less detrimental after this six-month time. Six months of timely payments can help your credit score recover in the interim.

5. Pay off accounts that are past due

If you owe money, try to address those payments asap. Your credit report will show any outstanding debts, which will hurt your chances of getting a mortgage. Accounts that are late, have been charged off, have bills in collection, or have been judged are all delinquent accounts. The payment history part of your FICO score, which is the most important part of your credit score, will be affected by debts that are in collections. It's a good idea to try to fix these problems, because a lender may look at them when deciding whether or not to give you a mortgage.

6. Decrease your debt-to-income ratio

If you have a lot of debt in comparison to your salary, your bank's mortgage underwriter may have concerns about your capacity to pay your mortgage. This number, also referred to as your "debt-to-income ratio," contrasts the amount you owe (your debt) with the amount of money you have coming in (your income). This number should be as low as feasible for lenders. Your debt-to-income ratio actually needs to be lower than 43% in order to qualify for a mortgage. Therefore, you are not allowed to spend more than 43% of your salary on debt. 

Look for ways that you can boost your income, for example, by getting a side hustle to lower your debt-to-income ratio. However, it might be simpler to reduce your debt if you pay off any ongoing debts like loans or bills and refrain from taking on more debt than you can handle.

7. Avoid taking on any new debt

Even if your ratio of debt to income remains low after you take on additional debt, a mortgage lender may still be skeptical of your ability to maintain stable financial footing. It is in your best interest to refrain from engaging in any new transactions that involve credit until after you have successfully closed on your mortgage. This includes making applications for credit cards, which is especially important considering the impact that credit inquiries have on a person's credit score. To be on the safe side, it also includes loans for cars and personal loans. After you've settled on a mortgage rate and completed the purchase of the home, you should think about whether or not you want to take on any further debt.

Take a look at the best mortgages rates today

Next steps

It could take some time to repair your credit, especially if you have a history of late payments or have to deal with major situations like bankruptcy or foreclosure.

However, the secret for the typical first-time home buyer is solid habits. Maintain your timely payments, keep your credit card usage minimal, and refrain from taking on additional debt. If you have good or excellent credit, you can concentrate on getting ready for your mortgage application.

Feeling A Bit Overwhelmed?

Don't worry, because you're not alone here! The team at Vincere Wealth Management can help you come up with a plan that fits your specific needs and gets you to where you want to be. Talk to them to get moving into your dream home.

Speak with an advisor here.

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