Preparing to buy a home? Work on building up your credit rating to make sure you qualify for a good mortgage. Here are eight useful tips that will help you toward this goal:
Get a good head start
It’s never too early to start improve your credit score. In fact, the more lead time you have before you apply for a mortgage (or just a loan pre-approval), the better you can make your credit score.
The following tips will work best if you act on boosting your credit rating months ahead of any other steps in your home buying process.
Review your credit report and dispute any discrepancies and errors Get free copies of your Equifax, Experian, and TransUnion credit reports from this website. Review each credit report in detail to see if there is any inaccurate information on your record. Dispute any errors that you find with the credit bureau concerned.
Pay off significant outstanding debt
To make sure that your lender does not find a large amount of debt under your name, pay off as much of your outstanding debts as you can. Try to reduce your total debt payments to no more than 12% of your monthly income. This will give you room to take on a mortgage that will increase your debt-to-income ratio to 43% at most.
Avoid adding new debt and high-value purchases
On a related note, be careful not to add any new debt – even if you’re still within range of your below 12% debt-to-income ratio target. Avoid making large purchases and transactions like buying a car around the same time that you’re taking out a home loan.
Set up auto-payments
After you take care of your existing debt, make sure that you don’t miss any payment due dates. Set up payment reminders on your calendar, as well as auto-debit transactions on your bank account.
Timely payments made over time – typically after a period of six months – will help you bury delinquent or late payment patterns you’ve made in the past.
Keep balances low on revolving credit
Another number that lenders look at when evaluating borrowers’ credit-worthiness is the credit utilization ratio. This number is an indicator of how well you manage your credit – or simply, whether or not you max out your credit cards frequently.
Manage your credit use to keep the ratio at 30% or lower. You can keep track of this number by dividing your total outstanding credit card balances at any given time by your total credit limit.
Open new credit accounts only if absolutely necessary
Don’t be misled into opening new credit accounts in an attempt to improve your credit mix. The application processes involved can result in multiple hard inquiries on your credit report – which are typically flagged by lenders. In addition, having too many credit cards leaves you open to the temptations of spending and accumulating even more debt.
Don’t close inactive credit accounts
While it’s not advisable to open new credit accounts, don’t close your unused credit cards either. Doing so will increase your credit utilization ratio because your total credit limit will drop. You can keep inactive credit accounts open as long as you are not spending too much on annual fees to maintain them.