Your credit score plays a critical role in your ability to qualify for a mortgage. In fact, most lenders looking for a FICO score of at least 700 and above before pre-approving your loan application. Having a lower credit score doesn’t necessarily mean your loan application will get rejected, but you may be saddled with higher interest rates.
Naturally, it makes sense to have your credit in order before applying for a mortgage. Here are 4 ways to do just that.
Get a Copy of Your Credit Report
It’s a good idea to check your credit report for discrepancies and other issues several months before applying for a mortgage. This lets you do two things:
- First, it allows you to spot and correct any mistakes in your credit report before you apply for your loan.
- Second, it gives you time to repair your score, especially if you have a habit of paying your bills late or have too much debt.
You can get a free copy of your credit report from any of the major credit bureaus once every 12 months. You will, however, need to pay to see your actual score.
Dispute Discrepancies
Should your credit report contain errors, such as an an account that isn’t yours or an unpaid expense that was already taken care of, file a dispute ASAP. A 2012 study by the FTC found that around one in every five consumers had a discrepancy that was corrected by a credit reporting agency after being disputed. In other words, errors are more common than you think. But more importantly, 13 percent of the study’s respondents saw a change in their credit scores after filing a dispute.
Open Trade Lines
Your typical mortgage lender will look for at least three tradelines, any account on your credit report, such as a credit card, a car loan, or a student loan, that have been active for at least 12 months. FHA loans, which tend to have more lenient underwriting guidelines, need at least two tradelines.
Adding tradelines several months before your mortgage application can be a good way to repair your credit, but be careful. The last thing you want is to be in too much debt. If you’re going to open a new credit card, make sure you use it to spend on things you’re going to buy anyway in cash, such as gas, food, and other expenses. And be sure to pay in full when you get your bill.
Don’t Use Your Credit Card to Make Major Purchases Before Closing
In their eagerness to move into a new home, many homebuyers will buy new appliances, furniture, sometimes even a new car before closing the mortgage. This is all well and good if you’re going to pay in cash, but using your credit card means adding to your debt, which in turn affects your credit score. And you can bet that lenders will monitor your credit until closing the loan. Any changes may delay your loan approval or increase your interest rate.
To learn more about repairing and maintaining your credit score before applying for a home loan, don’t hesitate to schedule a consultation with mortgage and credit expert Chris Lamm.