If you are interested in purchasing a home, ideally you should begin your quest to improve your credit rating at least 6 months before applying for a home loan. It takes time to make any headway on a poor or average credit score. Even 6 months might not even be enough for credit challenged home seekers. Let's take a look at three specific steps to boost your credit score to increase the chances of approval for a home loan.
Inspect All of Your Credit Reports and Address Errors
While it is important to have a consistent source of income and a sizable down payment or a house, your credit score is also critical. It represents your history of financial trustworthiness. You should examine all three versions of your credit report very closely and take immediate actions to correct any mistakes. You can obtain a free credit report each year from the three major credit bureaus at www.annualcreditreport.com. If you do find an error, it may take significant time to remedy any errors that you find on your credit reports. This is why we recommend beginning the process early.
If there is any incorrect information on any of the three credit reports, your application for a home loan could be denied. Keep in mind that lenders can check any one of the three credit reports so be sure to dispute any errors that you find on all of them. Don't check merely one or two of the reports. They might have inconsistencies with the third report.
Pay Off Problem Accounts
If you have any delinquent accounts, charge-offs, judgments, accounts in collection, or payments that are overdue, pay them off right away. You need to do everything that you can to persuade mortgage lenders that you are capable of paying your bills on-time. You also need to pay at least the minimum amount that is due. Partial payments can negatively affect your credit score if you fail to meet the monthly minimum payment in full by the deadline.
Those with accounts in collections and those who have judgments or charge-offs on their credit reports have slim chances of being approved for a mortgage. The debtor must proactively address them in order to prove that they are capable of being responsible for a home mortgage. That said, don't rush to close these delinquent accounts after paying them up. If your lender is willing to keep them open, doing so will likely benefit your credit score as long as you keep your balance low and make on-time payments in the future.
Decrease Your Debt to Income Ratio
While periodically using credit cards and taking out loans helps your credit rating, holding onto significant balances for extended periods without paying them off in full will damage your credit score. When reviewing your loan application, the mortgage underwriter determines whether an applicant's income level and debt level will allow them to make home mortgage payments on time and in full. Those with an elevated level of debt when compared to income will likely struggle to pay their home mortgage on time. To keep a good credit score, your debt should never exceed ten percent of your income.
Cleaning up your credit for a home loan can seem like a daunting task, but if you take it bit by bit, your credit score will be gleaming before you know it.