People with the highest credit score get the lowest interest mortgages. One of the key factors lenders look at when considering you for a mortgage is your credit score. Although a good credit score isn’t a golden ticket, you want a high score when you apply for a loan. A high credit score gives you more options. A low credit score, on the other hand, is a disadvantage.
Credit bureaus calculate your credit score based on the information in your credit report. Lenders prefer to lend to people with higher credit scores. A high credit score shows a strong credit history and can help you qualify for the lowest possible home loan interest rates. Having a high FICO Score boosts your chances to qualify for favorable loan terms.
Lower interest rates are highly desired because they mean lower monthly mortgage payments. The lower interest rate means that you will pay a smaller amount for interest over the life of your mortgage. The bottom line about lower interest rates is that you can save a lot of money by improving your credit score before you apply for a home loan. The good news is that there are several ways to boost your credit score.
You can improve your credit score before you apply for a mortgage in the following ways:
Be Informed About Your Credit Score
Knowledge is power. Being familiar with your credit score is step number one toward improving it. Federal law allows you to get a free credit report each year from the three major credit bureaus. Take advantage of this opportunity to avoid any surprises. When you get your report, take a close look at it—particularly check for errors and late or unmade payments.
If there’s something that doesn’t look quite right, you may be able to dispute it. The nation’s primary credit reporting agencies (Equifax, Experian, and TransUnion) all provide ways to file a dispute, so it may be worthwhile to contact them if something is wrong.
If everything is accurate, you could still make use of your credit report by searching for opportunities for improvement. If you have a good payment history but tend to have high balances, for instance, keeping your credit use down may be a good place to start.
Contact a mortgage broker to find out more about your credit score and home loans.
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What are the three most common credit report errors?
Don’t assume that your credit report is perfect. Often, people find out that there are inaccuracies on their credit reports. Mistakes and inaccuracies can hurt your credit, so you should dispute them as soon as possible. Legally, credit bureaus required to investigate when you dispute errors and inaccuracies on your credit report.
The most common credit report errors are:
- Fraudulent accounts (particularly if you have been a victim of identity theft)
- Outdated information (like derogatory accounts over seven or ten years old)
- Incorrect date of first delinquency on a collection account
- Duplicate errors – You might identify the same debt multiple times on your report.
- Name misspellings
- Balance errors – The balance on your account or the credit limit might be incorrect.
- Incorrect accounts – There may be inaccuracies about your accounts. For example, an account that is open may be reported as closed. Also, there may be an account where you have been making payments on time but it is reported as delinquent.
- Accounts from an ex-spouse
How do I correct an error on my credit report?
If you have found an error on one of your credit reports, you can fix it. To remove an error, you have to file a dispute with the corresponding credit bureau. For example, you discovered the error on a TransUnion credit report you need to file a credit dispute with them. Go to their website and search for either “credit dispute” or “dispute information.”
How long does it take to fix an error on your credit report?
Credit reporting agencies have five business days after completing an investigation to notify you of their decision. Normally, credit bureaus are required to complete dispute investigations within 30-days.
How quickly will my credit score update after an error or mistake is removed?
You can expect a change in your credit score in about two months, but it may take even longer.
Can disputing credit report errors hurt your credit?
Disputing a mistake or error on your credit report has no impact on your credit score. Your credit score may or may not change after a dispute and correction on your credit report. Not all credit report corrections will result in an improvement in your credit score.
Keep on Top of Payments
As you probably know, one of the easiest ways to improve credit is by paying bills (including mortgage payments) on time. That may be a lot easier on paper than it is in practice, though. Life happens, and sometimes you forget. Autopay is a great way to make sure that you never forget a payment.
Rather than put the entire burden on your own memory, try setting up payment reminders. This can be done through alerts on your phone or special apps. Some companies provide options for email or text alerts when bills are due. Check with your lenders about email or text message reminders.
Improve Your Credit Balance
Along with timely payments, a low credit balance can improve your credit score. On the other hand, it can be risky if your balance is near the limit. Credit reporting agencies refer to high credit balance as a high credit utilization ratio. A high credit balance can have a negative impact on your credit score. According to Equifax, any amount over 30% of your limit could affect your credit score.
The most straightforward way to lower your credit utilization is by paying down the balance. If you can bring it below the 30% mark, it could help your score.
If you’re unable to pay down the balance immediately, another option is to try to raise your credit limit. This can be done by contacting your creditor and ask for a higher limit. If they raise your credit limit, make sure to keep your credit utilization ratio below 30%.
Pay Multiple Times Per Month
A little-known fact of how credit works is the way creditors report balances. Creditors report balances once a month. This means that if your account’s balance is nearly maxed out at the beginning of the month, that is what will be reported to the credit bureaus, even if you pay it down on time. While you may not have late payments, you will appear to have a high balance.
One way around this is to make multiple payments per month. Once you have your balance paid off from last month, consider making a payment after a couple of weeks to cover purchases made during that time. This can make your balance appear lower when it’s reported, and, according to Experian, it can help you avoid late payments as well. On-time payments, coupled with low balances, are critical factors of good credit scores.
Become an Authorized User
If all else fails, it may be possible to piggyback on someone else’s credit. If you can become an authorized user on someone else’s account, you might be able to benefit from their good credit utilization and repayment habits. The risk with this, of course, is they might not have very good credit either, so choose wisely.
Whether you’re a first-time homebuyer, have bought a house before, or are simply looking to refinance, these hacks could give you the edge you might need to have better mortgage options.
Do you have any questions about the relationship between your credit score and mortgages? Talk to a mortgage lender for help.
What Are The Key Factors Impacting Your FICO Score?
Your FICO score is a significant factor in getting approved for a mortgage or a refinance. FICO credit scores range from 300 to 850, from bad credit to excellent credit. 690 to 719 is considered good credit, and 720 and up is excellent credit. You should always try to keep your FICO credit score as high as possible. Financial experts recommend aiming for a score of 750 and higher. To get the best mortgage interest rate and loan terms, you need a good credit score.
What is a FICO Score?
Your FICO score is a calculation of how risky it is for lenders to offer you credit. Lenders want to offer credit to consumers who are likely to make payments on time and not default on their loan. Your credit score is a way for lenders to estimate whether or not you will be a responsible borrower.
Your FICO score affects all sorts of financial decisions, including credit cards, small business loans, auto loans, home loans, and more. Having a higher score could mean better loan terms such as lower mortgage interest rates and larger credit limits.
Reaching and keeping a high FICO score might seem difficult, but it is possible.
How is Your FICO Score Calculated?
Your FICO score is calculated based on your credit history. Although Fair Isaac, the makers of the FICO score, keep the exact formula secret. We know that five metrics are used to calculate your score. Each of these factors has a different level of impact on your FICO score:
1. Payment History – 35%
Your payment history is one of the most important determining factors in your FICO score. Late payments are reported to the credit bureaus. To make it worse, reported late payments stay on your credit report for seven years.
Do everything in your power to avoid late payments. If you think that you are unable to make a monthly payment for any reason, talk to your lender and ask for advice. You might be able to take advantage of a payment plan to avoid damaging your credit score.
2. Credit Utilization – 30%
Credit utilization is the ratio of your credit card balances to credit limits. The more of the available credit you use, the higher the credit utilization. For example, if the balance is $1000 and your credit limit is $2000, then credit utilization for that line of credit is 50%.
For a high FICO score, keep your credit utilization low. It is good to keep your credit card balance under 30% utilization. But credit card utilization under 10% is much better. Credit utilization over 30% month-to-month can hurt your score, and the higher this percentage is, the more it might leave a negative impact on your FICO score.
3. Length of Credit History – 15%
The length of your credit history is one of the slowest things to improve, but it is still important in calculating your credit score. The longer you’ve had credit – in the form of credit cards, an auto loan, student loans, etc. – the better. Avoid opening too many new lines of credit. New accounts can bring down your credit history average.
Keep older accounts open instead of closing them to improve your credit history. Young borrowers have little control over this factor, but parents might be able to help by co-signing on a line of credit.
4. Type of Credit – 10%
Lenders like to see a borrower who is responsible with all different types of credit. Having a variety of loans and credit is better than just having one or two. Having credit cards but no loans, or vice-versa, can make you appear inexperienced in borrowing money. Of course, you must be responsible with these lines of credit by making payments on time and keeping utilization low.
5. New Credit – 10%
Acquiring a large amount of new credit in a short amount of time can hurt your FICO score. Making multiple requests for loans or new credit cards can make you appear impulsive to a potential lender. Make sure that you only apply for new credit when it is financially responsible, and not just because you can’t afford something in hard cash.
First-time homebuyers and homeowners looking to refinance their mortgage should avoid applying for any new credit cards or personal loans during the approval process. Having a high FICO credit score is beneficial for mortgage loan applications.