Steps to Improve Your Credit Score Before Applying for a Mortgage Loan

We want to purchase our first home and want to make sure we are in a better position to qualify for the best rates. What are some things we can do to improve our credit scores?

Your credit score is a very important factor when engaging in a mortgage transaction. Your score can determine what loan programs you can qualify for, what rate you can get, and can even affect your closing costs since you may pay more or less in points due to credit score. Therefore, it’s always good to “prepare” your credit in advance when you are thinking about purchasing a home. Below are a few ways you can make sure your score is as high as possible when you get ready to shop for a home and a loan.

Pay down revolving account balances. Revolving accounts are accounts that can be paid down and used again. Most common revolving accounts are credit cards or other lines of credit. When a credit card or line of credit reaches or exceeds its max limit, it will negatively affect your credit score. Even if the payment is made on time every month, a maxed out or high balance credit card account will keep your score from going up. Paying down these balances, preferably below 30%-50% of the max limit, will increase your score rather quickly. Credit utilization (how much available credit you have used) plays a huge role in credit score determination.
Limit credit inquiries. When a company “inquires” into your credit (i.e. checks your credit) to determine if they can lend to you, it will negatively impact your credit score, so you want to limit these inquiries as much as possible. If you are considering purchasing a home in the near future (4-6 months), try to stay away from new purchases requiring credit being extended if at all possible until after you have purchased your home.
Pay off any judgments, tax liens, or collections. Not only can these lower your credit score, in many cases, they will keep you from getting a loan altogether. A judgment or tax lien will have to be paid off at or prior to closing, no exceptions. Collection accounts can be slightly more flexible, but having any of these open on your credit can keep your score from increasing. Paying them off will help the score to increase.
Make payments on time. This one seems obvious, but even one 30 day late on a credit account can do major damage to your credit score that could take a long time to repair.
Enroll in a credit monitoring service. I would suggest a service from one of the three major credit bureaus (Experian, Equifax, or Transunion) because they are typically the most accurate. These usually require a small monthly subscription fee, but they will give you monthly updates on your credit score, notify you of any changes in your score and why it changed, and also monitor suspicious activity. These services are just a great tool to keep tabs on what your score is doing and if there are any changes you should be aware of.

Your credit score is extremely important in determining the type of home loan you may qualify for. Being prepared and taking steps early to make sure the score is as high as possible will benefit you in the long run and make the loan process much smoother.