Your credit score is the biggest factor in determining the mortgage rate you receive, or even if you qualify for a home mortgage. If you have a good or higher credit score, it can ultimately save you thousands of dollars over the life of the loan. According to Experian®, the minimum credit score needed to apply for a conventional loan is 620. However, if you’re applying for a government-funded loan, you can qualify with a lower score but likely will have to pay for private mortgage insurance. For the best mortgage terms and rates, the ideal credit score is 720 or higher.
Before you start applying for a mortgage and searching for a home, the first thing you should do is check your credit score. You can receive a free copy of your credit report annually from each credit bureaus (Equifax®, Experian®, and TransUnion®). If your credit score is less than stellar or you want to increase your chances of getting a mortgage with a low-interest rate, try to improve your score as much as possible prior to starting the mortgage application process.
The best advice for maintaining or rebuilding credit is responsible management over time. There is no quick fix when it comes to improving your credit score – takes patience and discipline. Here are some tips to maintain or rebuild your good credit history:
Dispute errors and negative accounts.
When you receive your credit reports, review them for any discrepancies that could negatively impact your score. One report by the Federal Trade Commission revealed that 20% of all consumers had at least one error on their credit report. Some errors to look for include incorrect name or address, duplicate entries, and lines of credit that aren’t yours. Collection accounts and late payments may also be able to be removed.
If you find an error, you can dispute it with the credit bureau. Keep in mind you will have to file a dispute with each of the credit bureaus, as each one has a slightly different process in handling these cases. Once you file a dispute, each credit bureau will start an investigation and has 30 days to validate the dispute or it must be removed from your report.
Pay on time, every time.
In order to have and maintain good credit, you need to have a history of paying your bills on time, all the time. This not only includes credit cards and car loans, but also utility and cell phone bills. If you have a collections account, your payments (or lack thereof) will also affect your score. According to myFICO, payment history comprises 35% of your credit score. Even one late payment can negatively impact your score, so make it a habit to pay all your bills on time each month.
Have a healthy mix of credit accounts.
To maximize your credit score, it’s beneficial to have a few different types of credit and loan accounts. With all other factors being equal, a person with varied accounts (car loans, credit cards, and store cards) will have a higher score than a persona with only credit cards.
Pay down debt.
Two deciding factors in applying for a mortgage are your debt-to-income ratio and credit utilization ratio. Your debt-to-income ratio measures the amount of your monthly income that goes to paying off debts. Lenders prefer that your debt payments only take up a small portion of your total income (36% or lower). Paying down your debt or eliminating it completely can increase your chances of qualifying for a mortgage.
Your credit utilization ratio is the amount of available credit you are using. If you have a credit card with a $2,000 limit and you carry a balance of $800, your rate 40%. Ideally, lenders like to see a rate of 15% or less. Paying down your balances and keeping your ratio below 15% could increase your score by up to 50 points.
Do not close accounts.
Although it seems counterproductive, avoid closing credit card accounts – even if you don’t use them. Closing an account reduces credit available, thus increasing your credit utilization ratio. It’s actually best to leave the account open rather than closing it. Avoid making any changes to your credit accounts until your mortgage contract is signed.
Do not apply for new credit.
When you apply for a new line of credit or a loan, the creditor will run a credit information request known as a hard injury. A hard injury means you authorized the creditor to pull a copy of your full credit report; this will likely result in points being deducted from your credit score. Soft inquiries – including pre-qualified credit offers or insurance applications – do not affect your score. Hold off on opening new accounts until you’ve locked in your mortgage rate. If a lender sees too many credit inquires during the application process, it is a red flag that you’ve too dependent on credit.
Pacor Mortgage is your best resource when it comes to mortgage financing. For more than 34 years, our expert real estate team has helped homeowners like you navigate the challenging and always changing real estate market. We would be honored to help get you in the home of your dreams and stand out from the competition. Visit our website to create your account and start closing your loan in as little as 15 minutes.
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Loan officer NMLS #: 208731. Loan inquiries and applications in states where I am not licensed will be referred to a Pacor Loan Officer who is licensed in the property state. Pacor Mortgage Corp is located at 14930 Cicero Ave, Oak Forest, IL 60452, Phone 773-881-7744 (Unique Identifier #120945). Pacor Mortgage Corp is an equal housing lender and is licensed by the Secretary of State under the Illinois Residential Mortgage Lending Act and is assigned Illinois Residential Mortgage License MB.0000892. Pacor Mortgage Corp branches operate with the following licenses and is assigned Illinois Residential Mortgage License MB.0000892-001, with a Wisconsin License # 260345BA, Palos Heights NMLS 261297 and is assigned Illinois Residential Mortgage License MB.0000892-008, Colorado, Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, California license # 41DBO-67516, Florida MLD1075, Indiana DFI 13177, Maryland 23528, Michigan FL0828, Michigan SR1130, Minnesota MN-MO-120945, North Carolina L-184546, Ohio RM.804151.000, Pennsylvania 43855, South Carolina, MLS – 120945, Wisconsin 120945BA, Kalamazoo, MI NMLS 120945 also DBA Lake Pacor Home Mortgage. This is not an offer for an extension of credit, a rate lock or a commitment to lend. All loans must satisfy company underwriting guidelines and any investor overlays. Any of the advertised products may be discontinued at any time. Information and pricing are subject to change at any time and without notice. Loans are being committed and closed at expressed rates although these rates change and may not be available at time of your lock in, commitment and / or closing. Pacor Mortgage Corp is not affiliated with your current lender, nor is it an agency or extension of the Federal Government, Fannie Mae, Freddie Mac or HUD.