Improving Your Credit Score Before Buying a Home
Checking your credit score before making a big purchase such as a car or home is imperative. Even checking before things like renting an apartment, taking out any type of loan, or credit card is a good idea. Considering how many different things require your credit score, it shouldn’t be any surprise that many things can also affect it. Sometimes credit scores can get hit hard and require deliberate efforts to repair. What about if you’re planning on making a purchase as large as buying a home? How can you get your credit score high enough to qualify for a mortgage? Improving your credit score before buying a home means you will get the best loan terms possible.
Know Your Reporting Date
Every credit card company will send a monthly report of the balances on every credit card they have issued. These dates vary from company to company and are often on a specific day of the month. Rarely does it coincide with the end of the month. Getting in contact with your credit card company and asking them what day they send their monthly report will give you a perfect timeframe to know when to aim for a payment on your credit card. Why will this matter? The less your credit utilization ratio is, the higher your score will be. Of course, it is better if you were able to pay the credit card off in full before this date.
You want to aim for a credit utilization ratio of less than 10% across all your credit cards. However, less than 30% will still give you a positive statement on your credit history. Calculating your credit utilization ratio is rather simple. You take the balance and divide it by the credit limit, then multiply the result by 100. (i.e. $1,500 balance on a limit of $5,000 will give a utilization ratio of 30%). What is you have multiple credit cards? Simply add all the balances together and divide that by the added total credit limits and multiply by 100.
Diversify Your Credit
Spreading your credit out across multiple different accounts may seem like a catch-22. Most lenders are more interested in approving new loan applications or credit limit applications if they see that you have a variety of accounts in your credit report. This assumes, of course, they are all kept up-to-date on their payments. Such variety comes in the form of multiple credit card accounts and installment loans. This includes auto loans, student loans, and, yes, even mortgages. Having multiple accounts on your credit report help to diversify your report. It can also help to build your credit history since installment loans typically span many years.
Raise Your Credit Limit
Are you having trouble keeping your credit utilization under 10%-30%? Consider asking for your credit limit to be increased. By doing this, you won’t have to balance payments and purchases strictly in order to keep your credit utilization ratio lower. Take the same credit card as above with a $5,000 limit. If the limit was raised to $10,000 and you didn’t change your spending habits, you would still have a $1,500 balance. This would give you a utilization ratio of only 15% versus the 30% it had been.
Do some research before pursuing this avenue. Applying for a raised credit limit will give your credit score a “hard” check, which will penalize your credit score for up to a year. If your application is accepted, however, then the long-term payoff will be worth the short-term hit to your credit score.
Monitor Your Credit Score
Make sure you’re aware of your current credit score and all your current credit accounts. Sign up for credit reporting services, either through your credit card company, bank, or a third-party credit-monitoring software. Be careful of where you choose to monitor your credit. Some avenues of checking your credit will actually count against your credit score if you check it too frequently. Monitoring will keep you familiar with your payment history. It also keeps you on your toes to help save you from missing a payment. Lastly, checking your credit score history can alert you to errors, if someone fraudulently opened credit cards, or took out loans in your name. Don’t forgot that you are also entitled to one free credit report annually from each of the three major credit bureaus!
The lowest credit score that you will want to aim for is 580 unless you are applying for a VA-backed loan. These are specifically for eligible veterans and their dependents, and do not have a minimum credit score requirement set by the Department of Veteran’s Affairs. Non-veterans should look at FHA loans, which have approvals as low as 580. Scores of 620 or higher will help you get better interest rates. Until your credit score is at least at the lower limit, it’s best to hold off applying for that home loan until your score is higher.
Wait To Apply For Loans
Lastly, If you’re looking to raise your credit score in order to qualify for a mortgage, then wait to apply for the mortgage. As mentioned earlier, applying for more credit, which includes a mortgage, will give your credit score a “hard” check, which will hurt your credit score. Applying for loans, credit limit raises, and new credit cards all within a short time frame will definitely hit your credit score and can make each subsequent credit increase have a worse interest rate or even cause you to get rejected from some of the applications.
Hopefully these tips will give you the game plan you need to boost your credit and apply for the mortgage to buy the home of your dreams. Fixing your credit score isn’t a quick process and it can become very complicated in certain situations. Consulting with professionals about your credit report and setting up a personal game plan is the best way to boost your credit score.