Shopping for your dream home can be an exciting experience, but it’s also one filled with a lot of financial paperwork. In order for your mortgage application to get approved while landing a competitive interest rate, it’s important to improve your credit as much as possible. While credit repair is usually a long-term process, there are a few general rules of thumb to go by when you’re in the home-buying process. Follow these tips to maximize your credit score during one of the most important financial decisions you’ll ever make.
Check for Credit Errors on Your Report
When you first start thinking about buying a home, you’ll want to make sure your credit score is starting off from the right place. If you haven’t done so recently, go to AnnualCreditReport.com to access free copies of your three credit reports. These come from the major credit reporting agencies: Experian, Equifax, and TransUnion.
On these reports, you’ll find a listing of all your credit history, including credit card accounts, loans, and any lines of credit. Scour each one to help identify credit errors. If you see anything incorrect, such as a credit card you never opened or an outdated loan balance, you’ll want to take action before applying for a mortgage. Fixing credit mistakes found on a report involves initiating a credit dispute directly with the reporting agency. The process can take up to 30 days, so the earlier you resolve the issue, the better.
Stay on Top of Current Financial Obligations
Having a positive payment history is important during the home loan application process for a couple of different reasons. First, it’s the largest factor in determining your credit score. If you want to improve your credit, making your debt payments on time each month is an easy way to get the job done. A single late payment beyond 30 days after the due date can cause a drop in your credit score.
Additionally, your mortgage lender reviews entries in your credit report. If you have recent late payments, your application could be affected. At the very least, you may need to write a letter of explanation outlining why your payments were late, even if it happened a few years ago. To make the mortgage process as quick and easy as possible, it’s best to have as few late payments as possible, especially in recent months and years.
Make Multiple Credit Card Payments Each Month
Your mortgage application also includes a review of your existing debts. For an easy way to fix your credit score, consider making several payments a month on any credit card balance you may carry. The reason for this is that your credit report reflects just a moment in time, not the most up-to-date data. For example, if the mortgage lender pulls your credit report right before you make a credit card payment, your debt may look higher than it actually is because you haven’t made your payment yet.
Not only can higher debt balances affect your credit score (and consequently, your interest rate), it can also impact how much you’re allowed to borrow for your home. Showing a lower credit card balance could qualify you for a higher loan amount, if necessary.
Hold Off on Major Credit Decisions
Once you decide to actively start house hunting, put your other financial plans on hold. Taking out other types of loans can raise a big red flag to lenders. Plus, it can cause your credit score to drop. If you need a new car, personal loan, or even student loan, hold off until after you close on your new home. You could jeopardize your home loan approval if you take out any new credit.
Similarly, it’s also important not to close any existing accounts during your home search. The average age of your credit accounts is considered as part of your credit score. You could accidentally cause your score to lower by closing out old accounts. From a lender’s perspective, no news is good news when it comes to your credit.
Finally, you should also limit your cash purchases during the mortgage application process. When you submit your bank statements for review by your lender, they may require an explanation for any withdrawal in excess of $1,000. Refrain from making any major purchases until you’ve signed your paperwork at closing.
By following this simple credit protocol, you can make the mortgage application process much smoother and more efficient. At the end of the day, that means a faster closing time, so you can get the keys to your house as soon as possible.
Need some help with credit repair before you shop for a home? Get a free consultation at Ovation Credit.