“How to Boost Your Credit Score Before Buying a Home”

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Prepare Your Credit for a Mortgage with O1ne Mortgage

If you plan to buy a home in the coming year, taking steps now to spruce up your credit profile can increase your chances of qualifying for a mortgage and reduce the amount of interest you’ll be charged on the loan.

Steps to Prepare Your Credit for the Mortgage Process

1. Check Your Credit Report

Start by checking your credit report and score for free with Experian, as well as checking your credit reports from the other two credit bureaus—Equifax and TransUnion—at AnnualCreditReport.com. Your credit score will give you an idea of where you stand, and your reports will help you see which factors are impacting your score. As you review your credit reports, watch out for areas that need some attention, such as high-balance credit cards, past-due accounts, and inaccurate information.

If you find inaccurate or unfair information on your credit reports, you have the right to dispute that information with the relevant credit bureau. If the reporting agency confirms your dispute with its investigation, it’ll update or remove the negative information accordingly.

2. Make On-Time Payments

Your debt payment history is the most influential factor in your credit score, and late payments can make it difficult to get approved for a mortgage. Even if you do get approved, it could cause an increase in your interest rate. While you can’t do anything about past late payments, make it a priority to pay your bills on time going forward:

• Consider setting up automatic payments to avoid accidentally missing one.
• Have a cash buffer in your checking account to avoid returned payments.
• If you have any past-due accounts, get caught up as quickly as possible.

3. Keep Your Balances Low

If you use credit cards for everyday spending, your credit utilization rate is a crucial credit score factor. It shows how much of your available credit you’re using on your cards. As such, it’s important to try to avoid putting large purchases on them in the months leading up to your application and throughout the mortgage process. A high credit card balance reported to the credit bureaus can negatively impact your credit score, even if you pay it off by the due date.

4. Avoid Opening New Accounts

Every time you open a new credit card or loan, your ability to take on additional debt diminishes. In particular, mortgage lenders generally like to see no credit inquiries or new accounts on your credit reports in the six to 12 months leading up to your application. That’s because taking on new debt can temporarily impact your credit score. What’s more, it can increase your debt-to-income ratio (DTI)—the percentage of your gross monthly income that goes toward debt payments—which can make it challenging to get approved for the loan terms you want. If you absolutely need to apply for credit, be prepared to explain the reasons to your mortgage lender or consider delaying your mortgage application.

5. Keep Old Accounts Open

While it’s important to pay down credit card balances, avoid the temptation to close old accounts once you’ve paid them off. Your length of credit history is another factor in your credit score, and getting rid of an old account could potentially lower your score in the short term. If the card has an annual fee that you no longer want to pay, talk to your credit card issuer about downgrading the account to a card with no annual fee.

How to Reduce Debt Before Buying a Home

Your DTI isn’t included in your credit score, but it’s still a major aspect of your creditworthiness when applying for a mortgage loan. In general, mortgage lenders want your DTI to be less than 43%, though some loan programs go as high as 50%. For your housing costs only, lenders prefer a DTI of 28% or less. Here are some steps you can take:

Pay Off Loans With Low Balances

If you have loans or credit cards with relatively low balances, consider paying them off to lower your DTI. Note, however, that if you have an installment loan with 10 or fewer payments left, you can ask the lender to exclude the payment from your DTI without needing to pay it off.

Use the Debt Snowball Method

Depending on how much time you have, consider using the debt snowball method to accelerate your debt payoff. With this approach, you’ll make the minimum payment on all of your debts except for the one with the lowest balance. Put extra payments toward this account. Then, once it’s paid off, apply what you were paying to the account with the next lowest balance and keep doing that until your debts are paid off. While you can also use the debt avalanche method, which could help you save more money on interest, the snowball approach may be better if your priority is eliminating smaller balances quickly.

Pay Down Credit Card Balances

Even if you can’t pay them off right away, paying down credit card balances can help reduce your credit utilization rate, which is another major factor in your credit score. If you have one or more cards with a high utilization rate, paying them down can potentially help increase your score.

What Other Factors Do Mortgage Lenders Consider?

While your credit history is the more important factor mortgage lenders consider, there are several others that you’ll want to pay attention to as you prepare to apply:

• DTI: As previously mentioned, your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt payments. You’ll typically want a DTI below 43% to have a good chance of getting approved with favorable terms.
• Employment history: In addition to your income, lenders will want to see a stable employment history. If you’ve frequently bounced around to different jobs or you’ve recently switched to a different industry, it could impact your ability to get approved. The same goes if you’re self-employed with fluctuating income.
• Down payment: Not all home loan programs require a down payment, but loans with a high loan-to-value ratio tend to be riskier for lenders. If you’re applying for a conventional loan, you’ll typically have to pay for private mortgage insurance unless you put down 20% or more.
• Assets: Your application will look better if you have sufficient cash reserves and investment assets that you can convert to cash in the event of a financial emergency.

Next Steps in the Mortgage Loan Process

Once you’ve taken steps to improve your credit and build up a down payment, you’re ready to take the next steps in buying a home. Here’s what the mortgage process looks like:

1. Gather your financial paperwork to provide to the lender.
2. Shop around and compare rates and fees on your own or through a mortgage broker.
3. Get preapproved with the lender of your choice.
4. Shop for a home and make an offer.
5. Notify your lender when your offer is accepted to proceed with the underwriting process.
6. Lock in your interest rate.
7. Attend the closing meeting with the funds to pay your down payment and closing costs and to finalize the process.

Monitor Your Credit Throughout the Mortgage Process

With most loans, the approval process can occur on the same day, but mortgage loans can take one or two months to close. Before closing, the lender will review your credit history again to ensure that nothing has changed. If your credit score goes down or you’ve applied for other credit during the process, it could negatively impact your approval odds.

As a result, it’s critical that you not only prepare your credit for a mortgage application but also monitor your credit throughout the process. Keep track of your score and watch out for potential issues that arise that could hurt your chances of getting the loan. With Experian’s free credit monitoring service, you’ll get access to your FICO® Score☉ and Experian credit report, along with real-time alerts when changes are made to your report. With this tool, you’ll be able to stay on top of your credit leading up to and during the mortgage process.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you every step of the way!

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