6 Ways to Improve Your Credit for a Mortgage
Of all the information an underwriting team takes into consideration when evaluating your mortgage application, your credit score is one of the most important. A credit score is a measurement of your creditworthiness in the eyes of lenders, and it may directly impact your interest rate. In general, a higher credit score may coincide with a lower rate. If your credit score isn’t where you want it to be, these tips can help you improve it:
1. Monitor your credit score online
There are many free tools for checking your credit score online, from credit bureau
websites to third-party aggregators like myFico.com. Knowing your credit range may
give you an idea of where you stand and helps you understand the factors affecting it.
These may include length of credit history, number of accounts, overall credit utilization,
payment history and more.
While the top-tier credit score for mortgage borrowers is typically 760+, different loan
types require different minimum scores. An FHA loan, for example, may be obtained
with a credit score as low as 500, while some conventional loans typically require a
minimum of 620. Also, if you think there is an error on your credit report, you can begin
the process of having it corrected.
2. Pay all of your bills on time
Debt payment history has the most significant impact on your credit score. Late bill
payments reflect poorly on your credit and while you can’t change your payment history,
you can make it a priority to pay bills on time moving forward. Use calendar reminders
and automatic payments to avoid missing a deadline, keep a cash buffer in your
checking account to avoid returned checks, and get caught up on past due accounts as
quickly as possible.
3. Avoid opening new credit accounts
If you’re getting ready to apply for a mortgage, do not pursue any other new lines of
credit – car loans, credit cards, etc. Every time you increase your debt, it reduces your
on any hard credit inquiries or new accounts on your credit report in the 6-12 months
leading up to a mortgage.
New debt may impact your credit score and increase your debt-to-income ratio. This is a
measure of the amount of monthly income that must be used for debt payments. When
too much of your income is consumed by debt obligations, you may not qualify for
favorable mortgage terms – or any mortgage at all.
4. Limit large credit purchases
Many people put large purchases on a credit card and then pay the balance off over
time. This is normal consumer behavior. However, if you’re trying to get a mortgage,
avoid making large purchases on credit during the application and underwriting
process. High credit card balances can negatively affect your credit score, even if you
make on-time payments.
If possible, take this advice a step further and avoid large purchases altogether, even if
you’re paying in cash. That’s because you want to preserve cash on hand during the
mortgage process so you don’t find yourself in a situation where you can’t make the full
down payment or don’t have cash to cover closing costs. In fact, lenders factor your
liquid assets into the underwriting process, so having a cash cushion can only help.
5. Try to reduce your debts
Although your debt-to-income ratio doesn’t show up on your credit report, it’s an
essential calculation of your ability to repay. Mortgage lenders generally want to see an
overall DTI of 43% or less; for housing costs alone, they want that number down around
28%. That means a total mortgage payment – principal, interest, taxes, common
charges and insurance – that’s roughly one-quarter (or less) of your monthly gross
income.
This is where reducing debt will help. If you have loans or credit accounts with low
balances, consider paying them off in full. And if you have a fixed installment loan with
fewer than 10 payments left, you can ask your lender to remove it from their DTI
calculations. If you can't pay off a debt completely, it may be beneficial to pay the
balance down because reducing your credit utilization may help to increase your credit
score.
If you’ve exhausted every strategy for increasing your credit score in the hopes of
getting a lower interest rate, the next best thing you can do is save up for a down
payment. While mortgages can be obtained for as little as 0-3% down, a higher down
payment can help you in several ways.
First, it may give you access to even more loan options. Second, it may result in avoiding
having to pay private mortgage insurance (PMI), which can cost between 0.22% and
2.25% of your total loan every year. And third, it increases the equity you have in your
home, potentially making it easier in the future to refinance or borrow against the
property.
About Biagio P. Maffettone
Biagio P. Maffettone is Vice President of Sales for Meadowbrook Financial Mortgage
Bankers Corp and a Licensed Mortgage Loan Originator (NMLS ID 409994). Over more
than two decades, he’s built an award-winning practice as a licensed mortgage loan
originator, sales manager, and real estate financier with New York’s leading mortgage
banks. He is an expert in home financing solutions, including jumbo financing,
condo/co-op, new construction, first-time homebuyer, renovation, foreign national,
commercial, bridge financing/private money, fix-and-flip, cross collateralization, and
FHA/VA loans.
Disclaimer: This article is made available for educational purposes only, as well as to give you general information and a general understanding of
home mortgages – not to provide specific advice. By using the above information, you understand that there is no relationship between you and the
content publisher. The information in this article is intended to be general and may not apply to each individual’s unique situation
