Clean Up Your Credit Before Applying For A Mortgage

If you’re considering buying a new home and are planning to take out a mortgage to pay for it, you will definitely want to become familiar with your credit reports. Know in advance how your credit is going to look to potential lenders. Is there anything on your reports that may be problematic?  

It’s a good idea to order the three major credit reports (Equifax, TransUnion and Experian) a good 3 to 4 months before filling out a mortgage loan application. Really, the sooner you start working on beautifying your credit, the better. You will want to want to have plenty of time to fix any negative surprises you may find. One of the most important steps in preparing to buy a new home is to make sure you have shiny credit reports because with an an excellent credit score, you’ll be able to get the best rates and terms on your mortgage. Otherwise, you may be relegated to taking a sub-prime mortgage loan with a higher interest rate with less then optimum terms. 

Don’t make the mistake of diving into the house hunting phase without knowing exactly how much of a house you can afford. When working with a professional real estate agent or buyer’s agent, it will be recommend that you get pre-qualified for a mortgage before looking at new homes for sale. And before you attempt to get pre-qualified, take the necessary steps to clean up your credit and get your finances in tip-top shape.

FICO Score

The first thing you’ll need to know is what your FICO score is. FICO is a credit scoring system developed by Fair, Isaac and Company, Inc. that’s used by the majority of  lenders to determine a borrower’s creditworthiness.  Scores can range anywhere from 300 up-to 850.  Typically, the lower your score, the higher the interest rate will be on our mortgage loan.  Someone with a score above 720 will be considered a “good credit risk,” where as someone with a score below 600 will be considered a “poor credit risk.” 

The truth is, more than 30 million people in the U.S have credit scores under 620, which prevents them from obtaining favorable interest rates and terms on a mortgage. Typically, any score below 620 will fall into the sub-prime mortgage category. A score over 620 is the creditworthy borderline for most lenders, so your best bet is to get your score well above that mark. Many lenders will require a score of 760 or higher to get optimum loan rates.

FICO Score Breakdown

The following percentage breakdown is how your FICO score is rated:

• 35% - credit account payment history (slanted toward more recent history)
• 30% - outstanding debt to all creditors
• 15% - length of time as credit user
• 10% - recent history, i.e., how many loans or credit lines you have applied for within the past few months
• 10% - credit account mix, including installment loans, mortgages, credit cards, leases, etc.

Boosting Your Score

Follow these 4 basic steps to get your score up before applying for a mortgage loan:

1. Pull a free copy of your credit report

Under the Fair Credit Reporting Act, you are entitled to receive one free credit report per year from each of the three major credit reporting companies (Experian, Equifax, and TransUnion). To request your free reports, visit AnnualCreditReport.com.

2. Report any errors to the credit bureau

Carefully review each report and promptly correct any inaccuracies you find in writing, both to the agency and to the creditor. The credit reporting agency is legally bound to investigate the issue within 30 days. If a creditor does not verify that a ding is accurate within 30 days, it must be removed from your report.

3. Make all installment/revolving payments on time

Lenders report payments that are 60 days late and some report 30 days past due. Try making automatic payments on line if you’ve previously paid some of your bills late. Ignore any grace periods and pay bills at least one week ahead of due dates to be on the safe side, especially if you send in your payments via snail mail.

4. Pay down credit card debt

The less current debt to available credit (35% is best), the better your credit score will be. Don’t close old or unused accounts because the length of time you’ve had accounts open plays into the mix of your credit score and by closing old accounts you look like a “newbie borrower.”

By keeping on top of your finances, you’ll achieve an optimum credit score and guarantee the best mortgage for the new home of your dreams. For information on mortgages, visit New Homes Central Lending - the new home mortgage experts.

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