The first step to take before buying your first house is to prepare your finances, including your credit. Your credit score affects your ability to acquire a mortgage loan, the types of loan you qualify for and the offered mortgage interest rate. Before you start to apply for mortgage loans, improve your credit score with these four tips.
Get Credit Report Copy
Request, review and correct a copy of your credit report. You can request a free annual credit report from each of the three major credit reporting bureaus by going to AnnualCreditReport.com. Review your report for errors such as incorrect balances and unlisted accounts. You can correct these errors by writing directly to each of the three bureaus: Experian, Equifax and Trans Union. Make sure that your credit report is corrected with all three of these bureaus, as your mortgage lender may use any out of the three to calculate your credit score.
Pay Off Outstanding Debts
Take a look at your cash reserves. If you have money in addition to your necessary down payment (and a buffer for any fees accrued throughout the process), it can be economical to pay off any outstanding debts, rather than contribute more to the principle of your home. A slightly higher interest rate can cost you thousands of dollars over the life of your loan. In general, unsecured debt such as credit cards will hurt you more than secured debt, such as auto loans, so credit card debt should be paid off first.
Avoid Closing Credit Accounts
Paying off and closing a credit card may actually hurt your credit score because it can reduce the length of your credit history. If you do want to close your accounts, make sure you do not close any of your older accounts. Closing a credit account can also increase your credit utilization ratio, as it will reduce the credit you have available, while not reducing the balances you have with the other accounts. Either way, it’s a bad idea to close accounts before you apply for a mortgage loan.
Prevent Any Unexpected Changes to Your Credit Score
Once you’ve improved your credit score, take action to ensure that changes to your credit history cannot be made accidentally. Something as simple as absentmindedly trying to sign up for a store credit card at the checkout line could lower your credit score. Your credit score will be checked repeatedly throughout the mortgage lending process.
A credit monitoring service can provide ongoing credit report surveillance for credit inquiries and access to online credit reports from all three bureaus. You can even gain insight into factors that determine your score and use credit score tracking to recognize important changes.
As you work on your credit score, you may want to inquire with your mortgage loan officer directly. Depending on your loan package, your credit requirements can change. For instance, first-time home buyer loans are open to those with a credit score as low as 500. Your mortgage loan officer will be able to give you the specifics.