It’s critical to think about how your credit score affects your ability to obtain a mortgage as the housing market heats up and more individuals consider purchasing a home. FICO scores of at least 720 or, in some situations, 740 are normally required by conventional mortgage lenders, although individuals with scores of at least 580 may still be eligible for an FHA loan.
In light of this, let’s take a look at the actions you should take to build your credit before submitting a mortgage application.
1. Examine your credit card
Check your credit record for any errors many months before you want to apply for a mortgage. Carolyn Warren, author of Mortgage Rip-Offs and Money Savers and Homebuyers Beware, advises checking your credit two to three months in advance if you typically pay your payments on time, just in case there are any errors that need to be fixed. Warren advises customers who are aware of late payments or other negative entries on their account to start making amends six to nine months before the event.
2. Challenge any errors
You should file a dispute with the credit reporting agency if your credit report contains inaccuracies, such as an unpaid item that you have already paid or an account that isn’t actually yours. According to a report released by the FTC earlier this year, about one-fourth of the reports that the agency analyzed had at least one “possibly substantial” inaccuracy.
3. Establish many tradelines.
A minimum of three active tradelines (any mix of credit cards, student loans, auto loans, etc.) from the previous 12 to 24 months are necessary for conventional loans. Two tradelines are needed for FHA loans. More is acceptable, but if you have fewer, you won’t be able to get a mortgage. Warren advises using a major credit card, such as a Visa or Mastercard (not a store credit card), at least six months before you apply for a mortgage and using it for purchases you would have made otherwise if you needed to open additional tradelines. She continues, “Never charge more than 30% of your permitted limit, and pay it off in full every time you get a bill.
4. Maintain active older credit lines
Keep those credit cards open even if you don’t use them frequently because older, more “seasoned” tradelines raise your credit score. Many people, according to Warren, believe that they should close the four unused credit cards out of their six total credit cards. But that’s a grave error as your stellar accounts are boosting your rating. Try to use those credit cards sometimes and settle the bill in full to keep those tradelines open.
5. Prevent establishing additional credit lines
Stop opening new credit lines while you’re six months out from making a mortgage application because doing so will temporarily reduce your score. According to Warren, “The credit bureau doesn’t know how you’re going to handle that additional credit,” therefore the uncertainty is a risk factor. “That 10% discount you’d get from a department shop for obtaining a new credit card is not worth lowering your credit score,”
6. Adopt a credit-free policy
Before closing, some people rush out to charge new furniture or appliances in the thrill of purchasing a home. However, even if you are in escrow, having a debt utilization ratio above 30% just before closing may cause your loan to be rejected. Have patience for your new furnishings until after your loan is closed, advises Warren, unless you want to pay cash. Delay acquiring a car loan as well because the requirements for car loans are sometimes less strict than those for mortgages.
7. Avoid moving money around.
You must submit several months’ worth of bank statements for your checking and savings accounts when you apply for a mortgage. You will also need to paper-trail the entire account, according to Warren, if you abruptly close an account or make a sizable transfer from one account to another. “For at least three months, keep your money and accounts the same. Though it won’t disqualify you, it will make paperwork more difficult.
