In order to access the best mortgage interest rates, it is important to prepare your credit for the loan application. Cleaning up your credit report and increasing your credit score will improve your chances of getting approved for a home loan. If your credit’s already good, maintaining it will be key to locking in a low-interest rate.
Learn the best way to build your credit for a mortgage.
1. Check Your Credit Reports
If you haven’t checked your credit scores and reports in a while, it is time to take a look and see where you stand with lenders. Go to annualcreditreport.com to get your free credit reports from each of the nationwide credit reporting agencies, Equifax, Experian, and TransUnion.
Order your credit reports from each agency three months before applying for a home loan. This will ensure you have time to correct any errors and improve your credit standing. You may have to pay a fee for your credit reports, but you can typically get them for free if you are unemployed and can prove it.
2. Increase Your Credit Score
Once you know your credit score and reports are accurate, there are some steps you can take to improve your score before you apply for a home loan. Check your credit card balances to ensure they stay below 30 percent of your credit limit. If you have cards with a higher balance, pay them off or cut them up.
If your credit score isn’t as high as you would like, consider applying for a credit card or loan to increase your credit report. You can do this right now, even if you aren’t planning to buy a home.
Finally, apply for a credit card if you don’t have one. Just make sure you pay it on time and in full each month. If you are pre-approved for a mortgage, you will be asked about your credit limit – use this to your advantage and show lenders that you have a solid credit history.
3. Improve Your Debt-To-Income Ratio
Your debt-to-income ratio, or DTI, is how lenders calculate your ability to handle your monthly mortgage payments on top of other debt obligations. The mortgage industry’s average DTI is 43 percent, but this varies by lender.
If you have a DTI greater than 43 percent, talk to your lender about ways to lower your debt. You may need to increase your income or pay off some debt.
4. Dispute Negative information
Credit errors are all too prevalent, according to the Federal Trade Commission (FTC).
You have the right under the FCRA to contest any inaccuracies with the appropriate credit agencies, and they must examine your dispute within 30 days.
Correcting and reporting problems that reduce your credit score should be at the top of your priority list for quick credit improvement.
You might even hire credit repair firms to submit challenges on your behalf. The Consumer Financial Protection Bureau (CFPB) does, however, provide free dispute letter templates to assist you in managing this procedure on your own.
5. Pay Down Debts on Time
Paying your bills on time is an excellent way to improve your credit score. Not only does it show lenders that you are a responsible borrower, but it can also lower your interest rate on the mortgage.
If you are going to miss your payment, call the lender to let them know. If you have a late payment in your credit report, send a letter to the lender explaining why. This could be enough to remove the late payment from your credit report.
Purchasing a house is one of the biggest financial commitments you will ever make in your lifetime.
If you follow the steps outlined in this guide and make smart choices with your mortgage, you could see your home come to fruition sooner than you think. The saying “time is money” rings true when it comes to purchasing a home. The sooner you start the process, the more likely you will be able to become a homeowner sooner.
Find the best home loan program for your financial situation with Century City Mortgage. We offer the best loans to help you get the home of your dreams. Get in touch with us today to learn how.