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If being approved for a loan is Step 1 in the home buying process, then getting your credit in order is Step 0. Your credit report can make the difference between being granted a home loan and being rejected right off the bat. Why? Because credit reports tell a financial story of your debt-paying capabilities, and ultimately determine if lenders have enough evidence that you can be a reliable mortgagor. 

The lower your score is, the harder it will be to obtain a home loan. That is why we recommend that before you go house shopping to study your credit report and clean it up as much as you possibly can. The time it’ll take to raise your score depends on the reason your score needs some work in the first place – if you have maxed out your credit card, for example, it could take a minimum of 3 months to get your score to improve. 

Sure, establishing good credit takes discipline, but it could be the practice you need to prepare yourself for the responsibility of maintaining good standing on a mortgage. When the time comes for a lender to pull your credit, follow this guide to make sure you get the green light of approval that an excellent score provides! 

What is “Bad” Credit? 

If your score is high, you’re considered creditworthy, which bodes well for your chances of getting a good mortgage. If your score is low, though, lenders might worry whether you’ll default on your home loan, and deny you a mortgage. Lower credit may also rack up your interest rate, making your monthly payments higher and possibly creating more difficulty to stay on top of your payments. Before applying for a home loan, make sure your score is in the “Good” range or above!

  • Perfect score: 850
  • Excellent score: 760–849
  • Good score: 700–759
  • Fair score: 650–699
  • Low score: 650 and below

What Lenders Look At

Your credit score is determined by taking each of the following sections of your report and weighing them according to a set standard:

  • Payment history: 35%
  • Outstanding debts: 30%
  • Length of your history: 15%
  • Types you have used: 10%
  • Amount of new credit: 10%

In general, the two things that will improve your score the most, are consistently making your payments on time and using your credit cards frugally. 

5 Steps to Improve your Credit Score

    1. Stay consistent with your payments
      • Your payment history is the largest contributor to your score, weighing in at 35%. You are likely to raise your score just by making payments on time!  
      • Pro tip: Set up automatic payments through your banking institution, or even put a monthly reminder on your calendar so you don’t forget to pay!
    1. Pay down your debt
      • Credit Utilization, or the balance of your debt to available credit, contributes 30% to a FICO Score’s calculation. A good rule of thumb is keeping your total balance at 30% or less of your total limit. From there you can work on trimming that down to 10% or less, which is considered ideal for improving your score.
      • Pro tip: Use your bank’s high balance alert feature so you can stop adding new charges if your utilization ratio is getting too high.
    1. Avoid Opening New Lines of Credit
      • If you are trying to lower your score, do not try to apply for a new credit card, car loan, or take on another major expense. Every time you apply for a new line of credit, a hard inquiry is pulled on your report. This type of inquiry lowers your score temporarily, but the effects of a hard inquiry last anywhere from 6 to 12 months.
      • Pro tip: Research your likelihood of approval to ensure you’re a good candidate before applying. You don’t want to risk lowering your score for a denied application. 
    1. Monitor Your Score
      • Monitoring your score’s fluctuations every few months can help you understand how well you’re managing your credit and whether you should make any changes.
      • Pro tip: You can pull a copy of your report from each of the three major national credit bureaus: Equifax, Experian, and TransUnion. This is considered a soft inquiry and will not affect your score the way hard inquiries do. 
    1. Leave Your Paid-Off Accounts As-Is
      • Paying off your debts is an exciting feat, and you may be tempted to remove all records of having them in the first place. Your credit history matters (it contributes 15% to your overall score), and proof of a paid-off debt will bode well for you! 

If you are considering buying your first home but are not confident in your credit worthiness, be patient. Establishing good habits like making your payments on time and not racking up credit card debt will work in your favor over time. 

When you do have your pre-approval in hand, we will be ready to help you purchase your well-deserved home!

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