Lenders use many factors to evaluate a customer’s mortgage application but without a doubt, credit reports and scores are supremely important. Based on the information in your credit report, a credit score is generated and the higher your score, the more likely it is that you will be approved for a mortgage, at the best possible interest rate the lender has to offer.
What does this mean? It means the better your credit is, the lower your interest rate, potentially saving you money over the life of your loan.
So before you apply for a mortgage, it is imperative that you do whatever you can to improve your credit score, and we are offering a few helpful tips on how to accomplish that.
Knowing Where You Are
The first step you must take is to fully understand where your credit report and credit score currently stand. In order to improve, you must be aware of your current credit status.
Begin by accessing your credit reports. By law, the three major credit bureaus – Equifax, Experian and TransUnion – must provide you with one free credit report from each every 12 months.
Carefully examine your credit report and score. This is the baseline from which all improvements will be measured.
Knowing How Credit Scores Are Formulated
FICO scores are the overwhelming preferred choice used by top lenders when making lending decisions. Because your FICO score is so critical to your overall loan application, you should have some awareness of how the score is formulated.
FICO scores are determined by analyzing both the positive and negative information in your credit report. The data is weighted into five main categories:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- New credit: 10 percent
- Types of credit used: 10 percent
Every lender has its own criteria with regard to how they underwrite new loans but you should be aware of exactly how vital your FICO score is to the process.
Many times there are errors in your credit report and they must be corrected as soon as possible. This is a crucial action to take and it can dramatically improve your credit score. If you find errors in your report, you must dispute them immediately by taking the following steps:
- Inform the appropriate credit bureau of the inaccurate information
- Include copies of supporting documents, identification of the items you’re disputing, and why you’re disputing it
- Request they delete or correct the error
- Send all documents and letter by certified mail
The credit bureaus are bound by law to investigate disputes within a 30 day period.
Removing Disputed Accounts
Once an account has been disputed, it will be labeled as such on your credit report. However, before you apply for a loan, those disputed accounts have to be eliminated from your report.
You can remove disputed accounts by contacting the credit bureau and the lender, bank or creditor that provided the information to the bureau. Under the Fair Credit Reporting Act, both parties are obligated to correct inaccurate or incomplete information in your report.
Reduce Your Debt
The “Amounts Owed” category on your credit report accounts for 30 percent of your score. Therefore, paying down your credit card balances to at least 30 percent of your total limit is an effective way to give your score a boost. Keeping your debt balances low can have a major impact on your FICO score.
Avoid Late Payments
Late payments and collections cause major damage to your credit report, and once a delinquent payment is recorded on your report, there's not much you can do to resolve it.
Paying your bills on time and avoiding late payments is the only way to maintain a positive payment history. Habitual late payments are one of the worst things to appear on a credit report.
Three Simple Rules
There are three simple rules for improving your FICO score:
- Pay all bills on time, every time
- Keep balances on credit cards low
- Apply for credit only when you need it
Keep revolving credit card accounts to a minimum. Several revolving accounts on a credit report is a red flag and will be seen as an inclination towards overspending.
Don’t Wait Until the Last Minute
It is very important to approach the mortgage process with the best possible credit position, but don’t wait until the last minute to improve your scores. Finding and correcting credit card errors could take months of effort, so give yourself ample time.
For further information about how to improve your credit score, please check out our previous article.