Preparing to buy a home should start long before walking through a potential home to purchase. Your first official step to buying a home should always be meeting with a lender for a pre-approval, but your credit is a mortgage factor you should be continually working on when you're wanting to achieve home financing.
Here are several ways to improve and build your credit score.
Check for Errors on Your Credit Report
An estimated one in five credit report contains a serious error, according to the Federal Trade Commission. Disputing an error is one of the fastest ways to improve your score. For example, an inaccurately reported late payment can drop your score 60 to 110 points, depending on your credit history.
Commonly disputed errors include:
- Reported late payments that were actually on time
- Inaccurate credit limit
- Inaccurate loan or account balance
- Accounts that do not belong to you
- Inaccurate account status, such as a past due account which is current
Pay Down Those High-Balance Cards
While paying off installment loans, like mortgage, auto, student, etc. can help increase your score, minimizing balances on revolving accounts like credit cards will increase it faster. Account balances are on the biggest factors affecting your credit score.
Aim for less than 30 percent credit utilization on each card; less than 10 percent is ideal. On another note, your debt is taken into consideration when getting approved for a mortgage so paying down that debt will likely increase the loan amount you are approved for.
Don't Close Old, Unused Accounts
While closing a zero-balance account will decrease the temptation of using that credit card, it rarely improves your credit score. Closing unused accounts not only lowers the amount of revolving accounts, which is an indication of creditworthiness, but it also decreases your total amount of available credit. Closing an account, specifically an older card, also shortens the timeline of your credit history.
Don't Pay Off That Old Collection...Yet
During the pre-approval stage, your mortgage lender will pull your credit report. If there are any outstanding collections, you lender will make sure you are aware of them. But before you pull out your checkbook to pay them off, wait for the go-ahead from your lender.
Paying an old bill that went to collections brings that discrepancy to the present and can cause a serious drop in your score. During the underwriting process, paying off that old collection will most likely become a pending condition to close.
Don't Open New Credit Accounts
When you apply for a new credit card, the creditor analyzes approval based on a copy of your credit report. This is called a "hard inquiry". Too many hard inquiries on your credit report can indicate a risky borrower and may drop your score.
Pay Your Bills on Time
While timeliness of bill paying may seem like a no-brainer in improving your credit score, it is a struggle for many consumers. Payment history is a huge part of what determines your score, so if you are often forgetful, sign up for payments to automatically withdraw from your account.
Building Limited Credit History
Sometimes potential homebuyers face a different type of issue with their credit score; instead of having a less-than-eligible score, they have too limited credit history. Certain loan types allow borrowers to use what is referred to as non-traditional credit. This allows borrowers to use accounts such as utility bills, phone bills, and rent payments in good standing as proof of credit history. So keep up-to-date on all of your bills that could serve as a form of non-traditional credit.
Talk to your mortgage banker about your options of using non-traditional credit toward your credit score.
While You're Waiting for Your Credit Score to Go Up...
Keep in mind that your credit score isn't determined solely on recent actions. it's impossible to determine how one specific action will affect an individual's credit score, but the above recommendations will help keep you on the right track.
If you have any questions about credit decisions while trying to improve you score, talk to your mortgage banker for suggestions.
Looking for more information about buying your first home? Our free Mortgage 101 Handbook is the ultimate home financing and buying guide for first-time homebuyers.