How Can I Raise My Credit Score To Get A Mortgage? | HowtoHome

How Can I Raise My Credit Score To Get A Mortgage?

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Many people share the goal to buy their own home, and those who have gone through the process know that a strong credit score can be key to securing the mortgage financing necessary to make that goal a reality. What should you do, then, if you think you have poor credit or believe that home ownership is beyond your reach?

This article looks to the role of the credit score – as well as other factors – in a mortgage company’s financing determination and offers some simple ways to help your credit score if you think it might be an issue.

What research shows is that buyers don’t always know the facts before they start, so getting the right information is one way of improving your situation. You need to know exactly where you stand before you take the plunge. Let’s start by dispelling some myths:

MythFact
  • Lenders need a minimum of 12 percent down payment
  • Your credit score has to be 650 or above
  • Your DTI (Debt to Income Ratio) needs to be under 40 percent
  • Some lenders will accept a down payment as low as 3 percent
  • Your credit score can be as low as 620
  • Your DTI can be as high as 50 percent

The best way to get a handle on what options are available to you is to seek advice from an independent mortgage broker. They can guide you in the right direction and give advice should you are worried about your eligibility for a mortgage.

Other Things Lenders Review

Credit scores record information about your credit history, from late payments to applications for credit or loans. Aside from your overall score, lenders will also look closely at red flags such as:

Multiple credit applications

If you apply for a host of credit cards or loans in a short period, this warns lenders that you may be a risk. The question they ask is: Why so many applications?

History of late payments

Nothing shows your financial mismanagement as much as multiple late payments as they indicate that you could be unreliable in paying what you owe. If you miss a $250 credit card payment, for example, who’s to say you won’t also miss your $2,500 mortgage payment? Late payments are no joke: they can stay on your credit report for up to 7 years.

Too Little Credit

At the other end of the spectrum, you could run the risk of not having enough of a credit history. Lenders need to see that you know what credit is and that you have experience with it before they lend to you. Think of it like a job interview: you wouldn’t expect to get the job if you couldn’t prove experience in the role, so applying for at least one credit card might show that you understand credit.

Know Your Credit Score

Under the Fair Credit Reporting Act, you are entitled to a free copy of your credit report every year. There are 3 major credit bureaus – Experian, Equifax, and Transunion – so be sure to ask for copies of your credit score from all three.

You can access your credit score via websites like creditkarma.com and freecreditscore.com. You can also get a copy of your credit report from each of the credit bureaus by visiting annualcreditreport.com.

What Is A Good Credit Score?

  • Excellent Credit Score: 750+
  • Good Credit Score: 700-749
  • Fair Credit Score: 650-699
  • Poor Credit Score: 600-649
  • Bad Credit Score: 600 or below

Before you start on your home-owning journey, you need to ensure that your credit score is as close to the excellent range so that you can boost your chances that your mortgage application will be approved.

How To Check Your Credit Report

Grab a highlighter pen and a cup of coffee, then sit down with all three reports and systematically work your way down each one checking the entries. You should be searching for the following:

Inaccuracies

It’s worth noting that credit scores are based on the data in the report being correct. According to the Federal Trade Commission, a study in 2012 revealed that as many as 1 in 5 people had errors on at least one of their credit reports.

Verifying the accuracy of the information on the report is crucial because if an error has occurred, it may impact your ability to secure a mortgage or borrow in the future. You wouldn’t want to pay the price for someone else’s financial mismanagement because your name was misspelled or your address was listed inaccurately.

Incorrect late payments

Companies make mistakes too. Check that the entries are correct and that any late payments listed are accurate. Question everything on the report. If you are confident that a late payment is listed in error, highlight it.

Unfamiliar payments

If you see something that raises your suspicions as a payment you don’t recognize, highlight it for attention later. It’s worth adopting the attitude that you may not always be at fault. The same applies for unfamiliar accounts on your credit report.

Historical entries

There could be some entries that are decades old, for example debts that you know have long since been settled. If these linger on your report, they might cause you damage.

Know Your Rights

So, what do you do if you spot an error or inaccuracy? Contact the credit bureau and dispute it. The Fair Credit Reporting Act lists the time limits on reporting differing debts on your credit score, so check this list out before you contact the credit bureau.

Keep in mind that raising a dispute doesn’t cost you anything, save for the time on the phone you might need to resolve the issue, and fixing these errors can go a long way to improving how to look to a mortgage company. You could also employ the services of a reputable credit repair company to follow up the credit bureau on your behalf. This isn’t the cheapest option, but it could be the easiest way to reduce that black mark against your name.

Make A Plan

Even after thoroughly reviewing your credit reports, you might come to the realization that you need to find other ways to improve your score. Once you’ve established where you stand, it’s no good burying your head in the sand. Only you can affect a change to improve your circumstances and chances of securing a mortgage. Some ways you can do this include:

Try to pay down the debt

Paying down the debt is the first step to taking responsibility and control, but it requires discipline. Budgeting is critical here; you have to adjust the way you live in many ways and sometimes make difficult choices to keep on track.

Paying down the debt is the single biggest thing you can do, though, because we know that the debt isn’t simply going to vanish. Look at ways to make savings, especially in some of the smallest things you do. For example, make a lunch to take to work rather than buying lunch every day. That will make for small savings each day but can add up to a lot over several months.

Don’t shift the debt around

Don’t try to hide the debt by swapping among different credit cards: it will still appear as a record on your credit file.

Avoid taking out loans

Taking out a loan isn’t the answer to paying off credit because a loan is credit and still appears on the report. Moreover, lenders take a dim view on anyone who tries this as it shows a lack of responsibility for your financial predicament.

Be Patient

Patience is very much the watchword here. Nothing you do will impact on your credit score overnight. Remember that it probably took years to accumulate lousy credit, so undoing the damage of poor financial management could take years too.

Know Your Credit Age

Your credit age is a term that implies the number of years you have had a good credit profile. For every year that you keep a clean record, your credit score improves. The minimum age you should be aiming for is 5 years, so be set for the long haul.

Final Thoughts

Securing a mortgage can be a long process, as you need to present your best case for why a lender should help you buy your dream home. This journey can become all the more difficult if you have a poor credit history, so you can help increase your chances for funding by taking steps to strengthen and secure your credit score.

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