Do you want to buy a home in the near future? Follow these tips to improve your credit before applying for a mortgage.
Most people who dream of buying a home will have to apply for and get a mortgage to cover that big expense. If you’re beginning to think about purchasing a house, you want to make sure that you’re fully ready for the mortgage process and that your credit is in good standing. This way, you’ll have a better chance of getting a better mortgage rate. If your credit needs some work, check out these tips to improve your credit score before applying for a mortgage.
1. Pay down your debt
If you have a lot of debt, it will hurt your chance of getting the best home loan. Mortgage lenders will look at your debt-to-income ratio (DTI). Your DTI is how much debt you have compared to the amount of income that you bring in. A lender will look at the minimum required payment for each of your debts and calculate a ratio based on your gross income. If you have a higher DTI, it can hurt your chances of getting a home loan. Before applying for a mortgage, spend some extra time paying down your debt.
2. Don’t add new debt
While you’re working to improve your credit, don’t be tempted to take on new debt. Sure, emergencies can happen. But now is not the right time to make a large purchase if it’s not a necessary expense. If you struggle with overspending, consider setting a budget so that you avoid taking on new debt.
3. Fix credit report errors
It’s a smart idea to take a close look at your credit report every year. This can help you better understand where your credit stands and detect any errors. If you notice inaccuracies on your credit report, dispute them. Ensure there are no errors like signs of identity theft, paid-off debt still showing as outstanding, or missing payments that were in fact paid on time. You can dispute credit report errors by reaching out to each of the three credit bureaus.
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4. Keep your older credit card accounts open
As you pay off your debt, you may be tempted to close older, unused accounts. That’s not a good idea. If you have credit cards that you no longer use, consider paying for small, regular purchases with them each month and quickly paying off the balance. Keeping these older accounts open increases the overall length of your credit history, which is a factor that makes up 15% of your credit score. The longer all of your accounts are open, the better your score will be.
5. Request a credit limit increase
If you have credit cards with lower credit limits, now is a good time to consider asking for a credit limit increase. If you’ve been paying your credit card bills on time, your card issuer will likely agree to raise your limit.
A credit limit increase can help you improve your credit utilization ratio, which is how much credit you use based on the total amount of credit available to you. Your credit utilization ratio makes up 30% of your credit score. The lower your ratio is, the better.
For example, if you’ve spent $500 on a credit card with a limit of $1,000, your credit utilization ratio is 50%. But if you’ve spent $500 dollars on a card with a $2,500 limit, your credit utilization ratio is 20%. Lowering this ratio improves your credit, which will come in handy when it’s time to apply for a mortgage.
The bottom line
To make your dreams of owning a home a rewarding experience, you want to make sure you’re putting your best foot forward when it comes time to reach out to mortgage lenders. These tips can help you improve your chances of getting a better home loan.
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Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.
