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Tips to Improve Your Credit Score Before Applying for a Mortgage

Credit score is important - here's how to maximize yours.
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When shopping for a mortgage, your credit score directly impacts the interest rate you will be able to obtain.  You can test this in real time with our rate quoting tool to see how differences in credit score result in higher or lower interest rate quotes.

Because your score can have such an impact, costing you real money, let’s look at a few straightforward ways you can potentially improve your score.

Pay Off Debt

Debt by itself isn’t always bad for your credit score, but a high ratio of debt to available credit does have a negative impact.  This is called your utilization ratio.  If you have relatively small credit lines, and each month you’re maxing them out (even if you pay your statement in full every month), it is reducing your score.

If you regularly use your cards for everyday expenses, one way to avoid this is to pay off those charges BEFORE your statement closes for the month, and BEFORE your statement is issued.  This means that when your statement comes out each month it will show a $0 balance.  This balance is the amount that will be reported to the credit bureaus.  Having this $0 balance each month will result in a very low utilization ratio.

If you do this for every card, you will be rewarded with a higher credit score.  This is a crucial step to take for several months before you apply for a mortgage.  There is often a one or two month lag time, or delay, in reporting to the credit bureaus, so you want to pay off charges immediately for a few months before your credit report is pulled by your lender.  The zero balances will have an added bonus of improving your debt to income ratio.

Remove Errors

If you’re unlucky enough to have errors on your credit report, you need to take action as quickly as possible to get those errors corrected.  The best way to do this is to work directly with the creditor who reported the erroneous data.  They should quickly remove it and ideally provide you with written confirmation that the error has been removed.

Negative marks such as a late payment can put a dent in your score, and there’s no reason you should be penalized for mistakes.

Try to Negotiate Goodwill Removal of a One Time Late Payment

Are you normally on time with your bill payments?  Did you have a month where something slipped through the cracks?  Perhaps you paid off a balance once month and accrued some interest that you weren’t aware of?  Things like this can happen, but you don’t have to let them ruin your perfect credit score.

If you have been an account holder for several years and have never had a late payment before, you may find that your creditor will remove a negative mark on your credit if you call and explain.  After all, they want to keep good customers happy!  It won’t work every time, but it can’t hurt to try.

Increase Credit Lines

Increasing your credit lines can have the same effect as paying off debt.  Call each creditor and ask to raise your credit limit.  Even if you’re carrying a small balance, the higher credit limit will mean that you’re using less of your total available credit.  Using only a small portion of available credit results in a low utilization ratio, and a higher credit score.

Maintain Old Accounts

Do you still have your very first credit card account open?  I do!  Even though it’s a very small credit limit with no perks or rewards program, I keep my oldest account open.  Why?  It increases the average age of all my accounts.

A longer credit history shows a pattern of your payment history.  If you’ve been using credit for the past 20 years and have never made a late payment, you have a great track record.  Compared to someone who has only established credit in the past 2 years, you are less likely to default in the eyes of a lender.  The person with the shorter credit history may never default on a loan either, but they don’t have as long of a track record yet.

Don’t Touch Old Collection Accounts

This may seem like bad advice, but you should not pay off old collection accounts right before applying for a mortgage.  If you have a few small accounts that went to collections several years ago, don’t touch them.  Old accounts are in the past.  Making a payment on them means the collection agency can report new activity on the account.  What does new activity on a collection account do to your score?  If you guessed “lower my score,” you guessed correctly!

The best thing you can do for old collection accounts is set aside the money to pay them off.  Depending on the amount owed, you may or may not need to pay them off to be approved for a loan.  Your loan officer can let you know whether these accounts will need to be paid.  Many times they do not need to be paid.

If they do, you will pay them at loan closing.  This means you will send the money you set aside, along with your down payment and other closing costs, to the escrow company.  Your escrow officer will include those accounts on your closing statement, and send a check to the creditor at closing.  This does two things – it assures the lender that the account was actually paid AND it does not affect your credit report for loan purposes.  The activity on the account will not report until AFTER loan closing.  At this point your score won’t be as important, and it will have time to recover.

Ask People You’ve Co-Signed for to Refinance

If you are a co-borrower on a loan for someone else, whether it’s a car loan, student loan, or credit card, ask them to refinance the debt in their name only.  This is more of a loan approval tip than a credit scoring tip, but it can help you qualify for a better rate or terms.  Less debt (and a lower debt to income (DTI) ratio) can also help you qualify for a higher loan amount.  Some loan programs also have lower DTI limits, particularly with jumbo loans and manually underwritten loans.  If you’re over the limit, you won’t qualify unless you buy a less expensive home or pay off debt.

If you have any questions on improving your credit score, please ask.  It’s always a good idea to review your credit report with a loan officer several months before you plan to purchase a home.  This may be just enough time to make some improvements, increase your score, and get a better rate on your loan.


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