If you plan on homeownership or a refinance of your mortgage in the near future, now is the time to enhance your credit.
Follow this guide to improve your chances of obtaining a better mortgage rate.
Check your credit.
Your credit report contains valuable information for lenders to review. It includes your past and present debt(s), along with the history of how well you kept up with your payments.
You'll more than likely need a minimum credit score of 620 to obtain a mortgage, but that can vary based on the type of loan you're applying for. Lenders look at reports from each of the three major credit bureaus — Equifax®, Experian® and TransUnion® — and usually use the median score when evaluating your application.
Checking your credit early helps you identify errors and past-due balances or collections, which could impact a lender's decision or require you to come up with more money. You have a legal right to dispute errors on your credit report, but keep in mind that it may take a lot of time and paperwork to get the issue resolved. You can't move forward with a mortgage application until all credit disputes are resolved.
It's important to get credit reports from everyone who will be listed as a borrower on the mortgage application. You can get a free copy of your credit report once a year from each credit bureau through AnnualCreditReport.com.
Pay your bills on time, every time.
Prospective lenders want to have confidence that you'll keep up with your commitment to them. A track record of missed or late payments can put a big dent in your credit score and make a lender think twice about taking you on as a borrower.
One smart way to avoid making late payments on accident is to have them automatically drafted from your bank account.
Pay down your debts.
Another factor in your credit score is credit utilization — the percentage of available credit you're currently using. Many people use a credit card for daily expenses to earn rewards. But doing so increases your credit utilization, even when you pay it off in full each month. In the few months before applying for a mortgage, switch to your debit card for your regular expenses.
If you carry a credit card or other debt from month to month, chip away at those balances to give yourself more breathing room. You'll generally make the fastest progress if you start with balances that have the highest interest rates.
In your zeal to pay down debts, don't get carried away and start closing off credit lines altogether. Length of credit is another factor lenders look at — and it's typically good to have accounts that have been maintained for a long time.
Don't add new debt.
Aside from wanting to have as low a debt load as possible, it's important to understand that recent applications for new credit can hurt your credit score since it could signal — rightly or wrongly — that you're having trouble making ends meet and are filling the gap with more borrowing.
If you have your eye on another big-ticket item like a new car, you're better off waiting until after your home purchase.
Boost your savings.
While it won't directly boost your credit score, having more money on hand may help a close lending decision go your way. It'll give you more flexibility with your purchase price, and a larger down payment can reduce your interest expense over time.
Encourage early giving.
If someone is planning to give you money to help you buy a home, the sooner they do so, the better.
When a lender reviews your finances, they'll apply a look-back period — usually 90 days or longer — to see how long you've had the money. In the wary eye of a mortgage lender, an influx of money could indicate that you're temporarily padding your accounts to qualify for a mortgage, or that the money is actually an informal, off-the-books loan that could hurt your ability to keep up with the mortgage.