Mortgage rates have been very volatile lately, so it’s important to have your credit score as high as possible before applying for a home loan to help make the process go quick and smooth.
Need ideas on how to get your credit to the best place possible before house shopping, or just curious of what impacts your credit score when buying a house? Then read on for ways to get your credit score prepared before buying a home.
Review your credit yourself
You first need to know what’s on your credit before you’ll know what you need to work on. There’s a few different ways to do this with various levels of detail. You can start off with the free services some credit cards offer, but I find they aren’t detailed enough to really see all the pain points.
Fortunately, each year you’re able to get a free credit report from each of the three credit bureaus. You will have to pay for your credit score if you want to see it, but you can at least review payment history and look for any unexpected items or accounts for free. This is probably the closest report to what a lender would see when they pull your credit, so it’s good to prepare yourself in advance for what they will see.
The only service I ever use to review my credit is AnnualCreditReport.com. I would suggest just pulling a report from just one of the three credit bureaus to start with. This way if there’s anything you need to work on you can pay off the item, dispute the account, or make other changes and then pull a new report for free from another credit bureau to make sure the updates have taken place.
If an account looks wrong or is not yours you can easily dispute it directly through the credit bureau’s website. You will need to set up an account but once you do, you should be able to easily navigate to where you can make the dispute. The creditor has 30 days to respond to your claim or the reporting agency will take action. It may take more than once to have an item removed, so don’t get discouraged if it didn’t work the first time around. You may just need to provide more details to back up your claim.
Boost your credit score as high as possible
This can be done a few ways. The two ways I’ve seen work in the past that don’t involve money are Experian Boost and being added as an authorized user to someone else’s credit card account.
Experian Boost takes the items you’re already paying for out of your checking account, like utility bills and streaming services, and reports it on your credit report. The idea is to have a more positive payment history to minimize any negative ones currently. It should only take a few minutes to set up and the benefit should be almost instant.
The other is asking a family member or close friend to add you as an authorized user to their credit card. It should be one that they rarely use that has a clean payment history. Make sure there is not a large balance or missed payments on that account, or being an authorized user could actually lower your score.
The account holder doesn’t need to give you the credit card or any access to their accounts, but you gain an increase credit availability and inherit their payment history on your credit report which can boost your score.
This is also good practice for kids needing to establish credit. The child can be added as an authorized user to their parent’s credit cards to begin a credit history. Some credit card companies don’t have a minimum age requirement so they can be added at any time.
Minimize debts and lower monthly payments
Once you’ve cleaned up any erroneous items it’s time to go to work on your debts.
It’s always a good idea to minimize your monthly expenses as much as possible to help you qualify for a larger loan amount and ensure you fall within the lenders required qualifying ratios.
The minimum monthly payment is what’s used in your qualifying ratios. If you have credit cards with small balances pay them off fully if possible so that there’s no minimum payment due.
If you can’t pay credit cards down all the way, at least work to get the balance below 50% utilized. Meaning, don’t carry a balance over 50% of your credit limit. Having credit card balances over 50% can negatively impact your credit score significantly when it’s time to pull your credit to get pre-approved.
Consolidating debt from one low limit card that’s maxed out to a higher limit card may also help if the combined balances are under 50% of the limit of the card you’re moving the balance to.
Installment loans
If you’re getting close to the end of a car loan or other installment debt, paying the balance down to where you only have 10 payments left may help lower your debt-to-income ratio and actually allow you to qualify for a larger payment. This strategy only works for certain loan types so don’t implement this strategy before speaking to your mortgage broker. Auto leases aren’t able to benefit from this strategy.
Ask that your rental history be reported
If you have a good payment history for an apartment or home that you’ve rented you can ask it be reported to help build your credit. Smaller landlords may not be able to comply with your request but it’s still worth asking.
Don’t open up new debt
You don’t want to take out new loans or give into that store card offer right before buying a house for a few reasons:
1. The age of your outstanding credit impacts your score.
2. The idea is to have your monthly payments as low as possible. Taking on new debts is going in the wrong direction.
3. Having a ton of hard credit pulls that are unnecessary is not doing your credit score any favors.
Keep or reduce the debts you have, don’t add, and ensure everything is paid on time.
While it’s not a good idea to open new debt before getting pre-qualified for a home, it’s a horrible idea to do while you’re actually in process for a home loan, and could actually hurt your chances of being approved.
DO NOT open any new debt while you’re in process of buying a home. No matter how many times I’ve said this, there are those who think it won’t matter. I promise you, the lender will find out if you’ve opened new debt and may deny your loan because of it.
Ask for a soft credit pull
Once you’ve worked through your credit as much as you can on your own, reach out to your mortgage broker and request they do an initial soft credit pull to review your credit report with you. A soft pull won’t show everything that a hard credit pull can, but it will provide a close idea of how your credit report is looking and give an estimate of your mortgage credit score. This will help your mortgage broker come up with a plan with you and walk you through other actions you can take.
It’s important to note that your mortgage credit score is generally not the FICO score you’re able to see for free using your bank’s or credit cards free credit monitoring tools. If you are monitoring your credit using any tool, be sure it specifies the score is your “mortgage credit score” and then it should line up with what lenders are using to qualify you for a mortgage. Anything else typically won’t match and can really be misleading.
Conclusion
Once you’ve reviewed your credit report on your own, worked through the items you could fix, and actioned any of the items that could help boost your score it’s time to commit.
There’s only so much you can do to improve your score in a reasonable amount of time. Spending years waiting for an item to fall off your report so that you can slightly improve your score usually isn’t worth it. Get your credit score to a good place and let your mortgage broker use their tools and knowledge to get you the best loan for you.
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