Good credit is one of the best tools you can have when it comes to applying for a mortgage. In fact, it is considered so important that many financial experts suggest that you should have good credit before even thinking of applying for a mortgage. Lenders consider your credit rating to be an indication of your level of risk when it comes to paying back a loan. To the lender, someone with a good credit score of around 780 has a much lower chance of getting behind on their payments than someone with a low score of around 600.
If you feel that your credit score isn’t as high as you would like it to be, there are some steps you can take to raise it. Firstly, make sure your credit score is accurate. It is estimated that around 25% of credit reports have serious errors on them. It can take as much as several months to correct a mistake, which isn’t an ideal situation if you are thinking of applying for a loan. The interest rate on a mortgage can be adversely affected by even a small error on a credit report. Checking your own credit report for errors does not affect the overall score. So checking it yourself can’t hurt.
Most financial experts will also tell you that it is a good idea to ask all your creditors to lower the amount of available credit that you have, as lenders will consider your total available credit to be relevant, even if you don’t actually owe that entire amount. A further step is to reduce the number of credit cards or open accounts that you have, be sure to make the request in writing and also to inform the three major credit reporting agencies (Equifax , Experian and TransUnion) of the closures.
However, if you are closing accounts, you should be careful which accounts to close. The length of your credit history also influences your ability to get a mortgage. If you have had a particular credit card for many years, it makes sense to keep that account open (and pay on time!) as it gives you a long credit history. A long and stable credit history will help you to maintain a good credit score in general. And it will ensure that you will have better options when it comes to a lender considering your application.
Another important consideration when it comes to approving you for a mortgage loan is your debt-to-income (DTI) ratio. Ideally, this should be at no more than 30%, meaning that your total debt amount each month should not be more than 30% of your net monthly income. Lenders tend to use this figure in addition to your available credit, as the two things don’t really have anything to do with one another. If your DTI is much higher, you should concentrate on paying some of this debt off as soon as possible. You should always pay off any higher interest credit cards first. Then once they are paid off, you can consider closing one or more accounts.
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Your history of paying bills and making other payments on time is the single biggest factor influencing your credit score. If at all possible, start paying all your bills on time. Although it is acceptable to occasionally be a few days late, bills that are 30 days or more overdue are reported to the credit bureaus and will have a negative impact on your credit rating. If you know you are going to be late paying a bill, call the company and politely request a grace period. Try to at least pay the most important bills on time, mortgage, car payments, home equity line, etc.
One of the easiest ways to ensure that your bills are paid on time and ultimately fix bad credit is to sign up for auto-payment of bills wherever possible. This process electronically connects your bank account to the bill payment system and automatically deducts the money from your account at the same time each month. You obviously will need to make sure there are sufficient funds in the account to cover the deductions. In the long run you will save time and postage and never have any late bills.
You should allow at least a year for your bad credit to be repaired. If you feel you can’t do this yourself, there are plenty of debt consolidation programs out there that may be able to assist you. Enrolling in such a program might adversely affect your credit. If you don’t have the luxury of waiting a year, you should not let poor credit stop you from applying for a mortgage. It is still possible to be a homeowner, although you may have to shop around to find a willing lender.
