When it to comes to mortgages, your credit score is a critically important factor on whether or not you will be approved for a loan, and the interest rate and terms for which you will qualify.
Good credit is more likely to secure a loan with favorable terms and interest rate. Lower scores can still qualify for a home mortgage but face additional loan adjustments, which in turn effects your interest rate and terms.
You want to get your credit score where it needs to be so that you can secure the best mortgage with the lowest rate. The key is to be proactive in improving your credit now.
Here are some tips on how to increase your credit score quickly:
Tip 1. Review your credit report for errors.
Request a free copy of your credit report. Look for errors that are lowering your score and alert the three credit bureaus about any errors you find. Disputing false claims and having them removed from your credit report can immediately raise your credit score.
A study from the Federal Trade Commission found that 20% of U.S. consumers had potentially costly mistakes on their credit reports. Luckily, you can check all your credit reports for free. The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.
All three nationwide credit reporting companies have set up a central website where you can order all three reports at the same time or each one separately.
Tip 2. Reduce your debt.
The most effective way to improve your credit score is to pay down your revolving debt, such as credit cards. You can apply your tax refund or end-of-year bonus to pay off your credit card debt and see your credit score improve fast.
Tip 3. Pay all bills on time.
Always pay at least the minimum payments, preferably more, by the due date each month. Having a history of making payments on time helps improve your credit score.
Did you know that even one late payment can reduce your credit score by more than 50 points? On-time payments are one of the most critical factors in calculating your credit score.
A creditor can report a late payment at any time, even if the payment is one day late. A shorter late payment, for example, 30 days late, is not as severe as a later payment, such as 90 days past-due.
We all get busy and forgetful at times. Still, it’s important to be consistent and diligent about making your bill payments on time. One missed payment may be an oversight, while five can be detrimental to your credit history and stay on your credit report for a few years.
If you can, it’s a good idea to set up auto-payments through your bank account, where your bills are paid each month automatically through ACH debits.
Tip 4. Don’t max out your credit cards.
Use your credit cards responsibly and try not to charge near or more than your credit limit, as that will lower your credit score. Ideally, you only want to charge as much as you can reasonably pay off each month.
Of course, sometimes emergencies come up when unexpected large purchases are necessary, such as for car repairs, medical expenses, or having to replace expensive electronics or home appliances, which is another reason to keep your balance low, so you have the credit available to cover such emergencies.
Tip 5. Keep credit accounts open.
Don’t close any financial accounts before applying for a home purchase loan or refinance. The longer accounts remain on your report, the better it is for your credit score. If you have a credit card you don’t use very often, try making a small purchase from time to time to prevent your account from becoming inactive.
The good news is, if you have a lower credit score now, you can take the steps outlined above to bring you closer to fulfilling your dream of becoming a homeowner. There are also loan options available that may still allow you to qualify. Mortgages backed by the government, including FHA loans, VA loans, and USDA loans, have lower down payment and credit score requirements, as these loan programs are considered less risky for lenders.
Speak to a Cross Timbers Mortgage loan specialist today to discuss your credit and see what type of mortgage you may qualify for, or what steps you can take now to become a homeowner in the near in the future.