Ready to buy a home? In addition to choosing a location, finding a realtor, and calculating what you can afford, it’s important to prepare your credit before applying for a mortgage. Not only does a good credit score increase your chances of approval, but it could also help save you tens of thousands of dollars in interest over the life of the loan.
Here are four ways to get your credit mortgage-ready:
1. Check Your Credit Reports and Scores
Before applying for a mortgage, it’s important to know what lenders will see when they check your credit reports and scores. Mortgage lenders may check more than one source, so it’s a smart move to get your reports from all three national credit bureaus (Experian, TransUnion, and Equifax). You can get a free copy of each of your reports at AnnualCreditReport.com.
Don’t be surprised if each credit report is a little different. Not all creditors report to all three bureaus, and they may send updates to the bureaus at different times. Review each credit report carefully to make sure it accurately reflects your credit history. If you see any inaccuracies, such as a payment incorrectly reported as late or an account you never applied for, dispute it with the credit bureau right away.
Also, look for credit score risk factors that could lower your credit score and send a red flag to potential lenders. Risk factors include excessively high credit card balances, payment delinquencies, accounts in collection, and other factors. Take measures to improve your credit before you submit your application to help boost your odds of approval and lower the cost of the loan.
2. Pay Every Bill on Time
As indicated above, late payments can lower your credit score, so it’s vital to pay all your bills on time going forward and bring any past-due accounts current. Payment history is the most significant factor in your credit score, so your payment habits can have a big effect on your mortgage interest and terms.
Most bills can be paid online, and signing up for autopay guarantees you’ll never miss a payment deadline again. Just be sure you keep track of autopayments so you aren’t caught off-guard by a poorly timed withdrawal.
3. Pay Down Your Credit Card Debt
Credit utilization, or how much of your available revolving credit you’re using, is the second most important factor in determining your credit score. Paying down your credit card balances will lower your credit utilization and can have a positive effect on your scores quickly.
To figure out your overall credit utilization ratio, divide the total of all your credit card balances by the total of all your credit limits; then divide by 100 to get a percentage. Always aim to keep your overall as well as per-card utilization ratio under 30% to avoid hurting your credit score. Getting your utilization down into single digits can have a positive impact on your credit scores within a month or two.
4. Avoid New Credit and Big Purchases
In the months leading up to a mortgage application, try not to take on any additional debt and avoid making large purchases that spike your credit card balance or decrease the amount you have in savings. When you apply for new credit, the lender will pull your credit report, which can slightly lower your credit score. Although your score may only drop a few points, you want to keep your credit score as high as possible when you’re preparing for a mortgage. Additionally, your mortgage lender may be wary of your ability to keep up with loan payments if you’re seeking other forms of credit before applying for a mortgage.
More debt also affects your debt-to-income ratio, which lenders consider when deciding how much to lend to you. Likewise, lenders look at how much money you have in savings, so even making a big purchase with cash could negatively affect your loan approval chances. Keep your debt down, your savings up, and put off any other big purchases until after you’ve been approved for a mortgage loan.
You can check your credit scores and monitor your credit for free through Experian to get a better understanding of what affects your credit over time.
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Maria Valdez Haubrich is the Executive Editor of SmallBizDaily.com where she is responsible for all web content. Previously she was the Executive Editor at Entrepreneur Magazine, where she worked for more than 20 years.