Do you know your credit score? This three-digit number is as important to the home buying process as your real estate agent and your down payment. Having the highest credit score possible can save you thousands of dollars over the course of your mortgage. If you are ready to invest in improving your number, here’s how.
What Credit Score Do You Need For A Home Loan?
Your credit score is at the center of the mortgage application process. Your lender uses this this score to determine whether you are eligible for a loan and what kind of interest rate they can offer. The lower your credit score, the higher your interest rate and the more you’re going to pay over the course of your loan. A higher score means lower rates and less paid in interest. The range between the best and worst rates can be up to a percentage point and a half.
FICO credit scores range from 350 to 850, with an 850 being truly exceptional, and 723 as the average score in the United States. To qualify for the best mortgage interest rates, you will want your credit to be at the 720 to 760 level or higher.
How To Improve Your Credit Score Prior to Approval
Your credit score is one of the most important parts of getting a mortgage, but it's also one of the easiest parts to control. If you have looked at the numbers above and want to improve your score, you can. Making small changes in how you handle your debts—some of which won't even cost you anything—can make a difference in your score and get you qualified or get you a lower interest rate. Below are seven tips on how you can positively impact your credit report and get approved:
1) Fix Any Credit Report Errors
If there are errors on your credit report, one of the best ways to improve your credit is to work with the companies that report them to get them corrected. Your loan officer may be able to help you build a strategy to determine which errors to work on first.
2) Pay Down Credit Card Balances
Paying down balances may help you in two ways. First, it lowers your monthly payments which can make your debt-to-income ratio look more attractive. Second, it lowers your credit utilization rate, which can make your credit score go up. The less of your credit you use, the better the risk you become.
3) Bring Past-Due Accounts Current
If you have accounts that are late but have not yet gone into collections, bringing them current can stop them from doing more damage to your credit report. As they transition back into on-time status, it could stop them from hurting your score further. Your credit score will rise as more time passes between bringing the accounts current and when you apply for a loan.
4) Use Your Credit Cards Less Frequently
Another way to show lower utilization is to simply use your credit cards less. You can simulate lower credit card usage by paying them down in the middle of the month. That way, your statement shows lower balances.
5) Increase Your Credit Limits
Another way to make your utilization look better is to call your credit card lenders and ask for a higher credit limit. If you owe $1,000 on a $2,000 limit, you're using 50 percent of your limit; if you can get an increase to $3,500, your utilization drops to 28.6 percent. However, be careful doing this as your credit card lender may perform a
hard inquiry that shows up on your credit report.
6) Apply for a New Credit Card
While the usual rule of thumb is to not change anything about your credit prior to applying for a home loan, adding an additional credit card can be one of the ways to improve your credit since it also lowers your credit utilization. To make sure that this strategy is appropriate for you, talk to your loan officer before making any applications.
7) Consider Credit Repair Services
If your credit report has old mistakes that you’ve already corrected or errors that you can prove are wrong, you may want to look into a form of credit repair called rapid rescoring. Credit bureaus offer this special process to many mortgage lenders and brokers. Lenders that offer it can bring your evidence to the credit bureaus, get your reports updated and get your credit score changed.
How to Maintain Your New Score During Closing
Once you have gotten your credit in shape and been approved for a mortgage, you need to make sure that you protect and continue to strengthen your credit score during the loan approval period in order to ensure a smooth closing process. Lenders are now required to check borrower's' credit twice during the loan application process: the first time during the pre-approval and the second time is just prior to your closing.
This second credit check has a big impact on your mortgage application because changes to your credit score could mean your application might be denied! But fear not—follow these seven quick tips to help protect your credit score during this important time.
1) Keep Paying on Time
As always, pay off your credit card obligations on time. Do not miss any card payments during your loan application. Even if you were previously pre-approved for a mortgage, one missed payment could bring your application process to a sudden halt or abrupt end.
2) Stay in the Job You Have
Do not change or quit your current job (unless you will be making more money). Lenders want to see that you have stability, and they want to see a steady or increasing income that will enable you to pay your mortgage. So, before entering that new position, check with your lender to discuss the possible impact of changing jobs during your application process.
3) Avoid Co-Signing Any Loans
Do not co-sign on other loans when applying for a mortgage. Even if you are not responsible for making payments on that loan, the bank will still view the loan as yours.
4) Do NOT Close Any Current Credit Cards
This one seems backwards. It's complicated, but when you close an account, you are reducing your line of available credit. As a result, you will be raising your debt to credit limit ratio. For example, if you have overall credit card limits of $10,000 and balances of $2,000, your ratio will be 20%. But, if you decided to close a line of credit with a limit of $6,000, your ratio will be raised up to 50%. Consequently, your ability to pay back a loan will appear less likely, causing the bank to view you as a risky investment and possibly retract your loan application.
5) Stick with a Single Bank
Stay with your current bank for your day-to-day banking needs. Just as with your employment history, lenders want to see stability. Plus, moving money around will only make it more difficult to track your fund and credit histories, extending your loan application period and increasing the chance something could go wrong.
A Small Number with a Big Impact
Individual decisions that you make every day—such as what you buy and how you pay for it—can add up to create your credit score. Managing this number responsibly can give you access to the mortgage you need to buy the home you want at a great rate. If your number is not where you want it to be, follow the tips above and see your credit score begin to rise.
If you need additional guidance on your credit score and getting a mortgage, contact a PennyMac Loan Officer today.