The credit score issued by the three major credit bureaus is the first item a loan officer looks at to determine what type of candidate you are for a home loan. The lower the score, the less likely you will qualify for a loan. Even if you qualify, you may be charged a higher interest rate to offset the lender’s risk in making the loan.
These are steps you can take now to improve your credit score over time.
- You are entitled to a free copy of your credit report each year from each of the three major credit bureaus. Visit Free Credit Report for more information.
- Check all three credit reports for errors. You might be surprised at the number of mistakes made on the average credit report. Each of the bureaus has an easy online method to report errors. Now is the time to correct these errors, not when you are under contract to purchase a new home.
- Reduce the amount you owe in debt. Pay off the entire balance of your credit cards each month if you are able. Note: You could lower your overall score if you simply transfer credit card debt from one card to another.
- Don’t close accounts. Ironically, credit bureaus penalize your score if you start closing credit lines. You need credit to get credit!
- Credit bureaus weigh the overall amount of open-line credit vs. the amount actually used. Avoid charging your credit cards to the maximum limit.
- Your credit score will be better if you wait a year after credit problems before applying for a mortgage.
- Wait until after you have actually closed on your home before using credit to purchase big-ticket items. Lenders will take a look at your credit reports just prior to closing the loan to make sure your debt ratio and scores are about the same as when you applied for the loan.
- Avoid applying for new credit prior to applying for a home loan. Too much available credit may lower your credit score.
- Too many inquiries into your credit can lower your credit score. Shop around for home loan rates within a 30-day period. The credit bureaus take into consideration that you are shopping for the same type of loan and count the multiple inquiries as one.
- Use a reputable lender! Ask me for referrals to trusted lenders.