When you are shopping around for the best deal on a mortgage or a refinance, it is an advantage to have a healthy credit score. Although your credit score isn’t the only factor, it is a very important part of the loan application process. Good credit can help you qualify for the best possible interest rates and loan terms. Your credit score can potentially save you money. Homebuyers should be concerned with the state of their credit score.
No one is perfect. We have all made mistakes. Unfortunately, some mistakes can decrease your credit score. The good news about the credit score is that there are ways to increase it.
While improving your credit score may seem daunting, there are several methods that can improve your credit. Depending on your situation, you may be able to increase your score in a short amount of time. Consider the following steps to potentially boost your credit score:
Always Make Payments on Time
Your payment history is one of the most important factors in calculating your credit score. Missing even one payment could take a large chunk out of your score. Late payments can stay on your credit report for up to 7-years.
Late payments can have a worse effect on your score the longer they sit unpaid, so even if you have missed a payment, you should still pay it immediately. If you think that you might be unable to make an upcoming payment, you should get in touch with your lender to discuss your options.
Increase Credit Limits
Your credit utilization percentage is also a very important part of calculating your credit score. Credit utilization is the amount you owe on a credit card compared to the credit limit on the card. An easy and quick way to decrease this percentage is to get a higher credit limit on one or all of your accounts.
You can contact your card issuer and request a higher credit limit. The card issuer might make a hard inquiry on your credit, but there is no harm in getting a credit limit increase.
Don’t increase your spending after the credit increase. It is best to use less than 30% of your available credit.
Pay Bills Before Reporting Dates
While your monthly payment could be due on a specific day of the month, your lender might report your debt balance to the credit bureaus on an earlier day. If you can find out which day this report happens, you can strategically pay your bill before this date. Doing this will make the debt balance reported to the credit bureaus lower, which will, in turn, lower your credit utilization.
Dispute All Credit Errors
It is beneficial to check your credit report at least once a year for changes and errors. If you notice anything that looks unusual on your credit report, contact the appropriate credit bureaus and ask for help. There could be errors on your report that you have no idea about, which could be hurting your credit score. Resolving these errors could be a quick way to boost your score. You can get a free credit report here.
Keep Lines of Credit Open
Don’t cancel a credit card just because you are no longer using it. The length of your credit history affects your credit score. The limits on these cards will also contribute to your total credit utilization, lowering your credit utilization ratio. You may need to use these cards occasionally to keep them active. Otherwise, the card issuer can close them for inactivity.
If you open too many new lines of credit, they could bring down the average length of your credit history. Aim for more old accounts than new accounts to avoid a decrease in your credit score.
Reduce Total Debt
This is easier said than done, but reducing your total debt could improve your credit score. Even a moderate decrease in your total debt could have a significant impact on your credit score. Minimize credit card use and increase your payments. If you have been making the minimum payments, consider increasing the amount you pay each month. The decrease in your total debt should help raise your credit score.
If you have questions about your credit score and mortgages, talk to a mortgage broker.
What is Debt To Income Ratio and How To Lower It?
Are you thinking about buying a home soon? Or how about refinancing your mortgage? If you are thinking of doing either, there is a number you should know in addition to your credit score.
It’s your debt-to-income ratio (DTI). Your DTI is one of several key factors that lenders look at during the mortgage application process.
What is DTI?
Your DTI is a percentage calculated by adding up your monthly minimum debt payments and dividing the total by your monthly gross income. Having a low DTI is important for getting the best mortgage interest rates.
Talk to a mortgage broker to help you calculate your DTI.
Each mortgage company might be slightly different, but a good percentage to aim for is 36% or less. Most lenders will approve home buyers with a DTI under this amount. Some lenders will give loans to borrowers with a DTI up to 43%, but these mortgage rates might be higher and might require more money down. Keep in mind that DTI is only one of the determining factors of the mortgage application process. There are several other deciding factors for mortgage approval.
How Do You Improve DTI?
Improving your DTI is fairly straightforward. Pay down your debt. Increase your income. Or do both, if you can. Mortgage brokers recommend following these three tips to improve your DTI:
1. Cut Your Spending
Decrease your spending. Pay off your credit cards. Lowering or eliminating your debt could improve your DTI, which is important when shopping for a home loan.
Sticking to a budget is a good way to control your spending. Easy places to spend less money include: eating out, gadget upgrades, clothing, and other unnecessary purchases. Cancel any subscriptions – like HBO, Spotify, Apple Music, Netflix, cable, and online games – that you aren’t using or don’t need.
If you have credit card debt, make a real effort to pay it off fast. Avoid credit for shopping. Only use cash for purchases. When using cash only, you won’t increase your credit card balance. If you don’t increase your debt, you will improve your DTI. Don’t fall into a habit of paying down your credit card balance and then racking it back up again.
2. Increase Your Income
If you are in a position at work where you could be eligible for a raise, the best thing to do is ask. The extra money can be beneficial in two ways; to pay down your existing debt and increase your monthly income.
If you’re feeling stagnant at your current company, it might be time to look for a new position. Many people report being able to increase their income more easily when negotiating for a new job, rather than waiting for a raise or promotion at their current job. Make sure that a potential new job will not drastically increase your expenses, because you will want to use this boost in income to pay off your debt.
Many people who are trying to gain control over their finances choose to increase their income. There are plenty of opportunities to make a little extra money on the side. You can use the extra cash to pay down your debt balance.
3. Consolidate and Pay Off Your Debt
If your goal is to improve your DTI ratio, consider debt consolidation. Focus on paying off the highest interest rate credit cards first. Since a huge part of the DTI ratio is the total amount of your monthly debt payments, lowering payments can have a positive impact on your DTI. If you have substantial home equity, you might consider a cash-out refinance. You might be able to use the money from the refinance to consolidate high-interest non-mortgage debt.
Do you have any questions about DTI, home mortgages, or refinancing? Talk to your mortgage lender today.