Did you know that your credit score and credit report play huge roles in the kind of mortgage that you get? They are the two essential elements that mortgage lenders use when deciding whether or not to approve you and what kind of mortgage rates they will give you. If you don't have a good credit score, it can even prevent you from getting a mortgage at all. Whereas a higher credit score reflects a strong credit history and puts you in a position for the lowest possible mortgage rates.
If you are thinking about buying a home in the future, it is so important that you and partner (if you have one) get your credit score in check. It will have a huge affect on your monthly payment and the overall mortgage that you obtain. To help you with this process, I have compiled useful information and steps that will help you improve your credit score. That way, you will be in the best position to buy a home in the future.
First, if you don't know your current credit score, you can find it out for free and it won't hurt your credit. Each of the nationwide credit reporting companies (Equifax, Experian, and TransUnion) are required to provide any person a free copy of their credit report per their request, once every 12 months. To order a free annual report, click here.
Next, it is important to understand what your credit score means. The following list will tell you how good your credit score is:
Excellent: 750 & Above
Good: 700 - 749
Fair: 650 - 699
Poor: 550 - 649
Bad: 550 & Below
In terms of buying a house, if you have a credit score below 620, you will be considered a sub-prime borrower which will result in a high interest rate and an expensive mortgage loan. 620 is the minimum score to get a conventional loan for a house that is backed by Fannie Mae or Freddie Mac. The lowest credit score to buy a house with an FHA loan is 580. With that said, every lender may raise or lower the bar based on certain factors like your income or size of your down payment.
If you credit score isn't excellent, there are things to approve upon. Here are things that you can do to raise your credit score.
Check Your Credit Report and Correct Any Mistakes
You need to thoroughly examine your credit report. If there is any incorrect information in your report such as late payments that were not late or accounts that are not yours, then you need to identify the errors and dispute them. Next, look for entries in your credit report that do not tell the whole story. For example, if you failed to pay a bill because you never received the service or product you were billed for, then there is no reason for it to hurt your credit score. To remove these blemishes off your credit report, you have to contact the reporting creditor (person/company that you owe money) or credit bureau.
Pay Your Current Bills
Payment history accounts for 35% of your credit score and current balances have much greater weight on your credit score than older entries. The amount you owe also greatly affects your credit score as it accounts for 30% of your credit score. If you don't have the money to pay your current bills ask a family member for some help. A personal loan from a family member will not show up on your credit report.
Join a Friend/Family Member's Credit Account
A quick and easy way to boost your credit score is to ask someone you are very close to that has a good credit score to add you to their existing credit account. As long as that person's account has been open for more than 2 years, you will get a quick bump in your credit score by being a joint owner of the account.
Make a Deal When Paying Old Debts
If there is a legitimate negative mark on your credit report, it will only come off if the creditor or credit bureau takes it off or seven years pass. So when paying off old bills, contact the creditor and tell them you will pay off the old amount in exchange for a written guarantee that they will remove the negative item from your credit report. This will not always work but if the creditor wants their money bad enough, they will agree to it.
Take Your Time
Fixing your credit score is not an over night process. It takes time but is definitely something that you have control over. By doing the right steps, your credit score can slowly raise as much as 5 to 10 points every month.
Do Not Close Unused Accounts
One thing you should not do if you are trying to boost your score is to close unused accounts. The length of your credit history is a factor in your score so the longer the accounts are open, they more they prove you are a trusted borrower.
Use Credit Wisely
Even though credit cards give you access to money that you don't technically have, that doesn't mean you should abuse it. Do not over extend yourself. Apply for credit only when you need it. It can be a red flag if a person has six different credit cards as it is potential risk for overspending.
Overall, if you are going to get a mortgage, you really want to have the best credit score and credit report possible. Therefore, be patient and work on accomplishing the steps above. The process of cleaning up your credit should be done several months or even years before you start the process of buying a home. Raising your credit score and not rushing into a mortgage is something that will help you in the long run.
To learn more about the mortgage process, visit our Mortgage 101 page.