If you’re thinking about buying a home soon, it may be worth spending some time preparing your credit score before you officially start buying. Here are actions you can start with now. Some of these can improve your credit score relatively quickly.
1. Check your credit history and reports
Knowing where you stand is the first step in preparing your creditworthiness for a mortgage loan. You can check your creditworthiness with the three national credit bureaus. If this is already 700 or higher, you may not need to make many changes before requesting pre-approval.
However, if your credit rating is so low that there is a risk of approval being denied on unfavorable terms or denied altogether, it is better to wait until you can make some improvements.
Receive a free copy of your credit report from each of the three national credit bureaus at AnnualCreditReport.com weekly through December 2023, and every 12 months thereafter.
Once you have your reports, read them through and look for items that you are unfamiliar with or that you think are inaccurate. If you find any inaccuracies, you can ask your lender to update their information with the credit bureaus. You also have the right to dispute the items directly with the agencies. This process can quickly improve your score if it removes a negative article.
2. Pay off debt
Paying off other debts can not only lower your debt-to-income ratio but also help improve your credit score. This is especially the case if you have credit card debt.
Your credit utilization — how much your credit card debt is in relation to your total available credit — is an important factor in determining your creditworthiness. While many credit experts recommend a credit utilization rate of 30% or less, there’s no hard and fast rule — the lower the better.
Because your credit utilization is calculated each month when you report your credit card balance to the credit bureaus, your credit score can change quickly when you’re paying off large credit card balances.
3. Avoid applying for a new loan
Virtually every time you apply for a loan, the lender performs a rigorous review of your credit report. In most cases, your credit score will drop less than five points, if at all, with a single request.
However, if you have multiple inquiries within a short period of time, this can have an amplifying effect and lower your credit score even further. (An exception is when you’re applying for multiple loans of the same type, such as a mortgage or car loan, to compare offers. Doing this in a short period of time will combine all of the requests into one, limiting the impact on your credit score. )
Also, keep in mind that borrowing new money can increase your DTI, which is a crucial factor for mortgage lenders.
4. Consider the wait
If your credit report contains some significant negative items, such as Bad debts, such as bankruptcy, collections, or foreclosure, may take longer to recover from your credit than high credit card balances or a late payment. In this case, it may be a good idea to wait until you’ve built a more positive credit history before applying for a large loan.
Even if the real estate market is hot or interest rates are rising, it could be worth waiting. Depending on how much flexibility you have, you may benefit from waiting until the market cools, allowing buyers to have more leverage than sellers, or until interest rates start falling again.
Think about more than just loan terms
A mortgage is a long-term financial obligation. Nevertheless, in certain situations it can still make sense to move into a house with less than ideal conditions.
If you live in an area where, for example, the mortgage payment would be cheaper than the rent you pay, you can even save money in the short term with a loan with a slightly higher interest rate. And if owning a home improves your overall quality of life, it might be worth spending a little more.
This story was produced by Experian and reviewed and distributed by Stacker Media.