5 Steps To Improve Credit Score Before A Home Loan

Importance Of A Credit Rating For A Home Loan

Your credit score, in other words, all the stuff that is on your credit report has a direct impact on your home loan application. It is the first document and factor that a mortgage lender looks at to assess your eligibility.

Different lenders have different underwriting guidelines. Most of the lenders look at several of the pieces of financial information of the potential borrower, such as employment history, income and job stability. 

It is possible that a lender may qualify you for a loan even though your credit score is on the low side.However, having a good credit score ensures you get approved with the best terms and conditions.

How To Improving Your Credit Score

So, what do you know about your credit score? Have you pulled your credit report and score did before the lender does? If you haven’t you should.

Checking and correcting your credit report is a way to improve your credit score. You should not leave this still too late. Do it at least six months prior to applying for the home loan. This gives you ample time to set records straight and for the results to show in the form of an improved credit rating.

If your credit score is good, that is, in the upper ends of 700, then you don’t have to bother. But if it is not, depending on how low it is, you are going to suffer for it by getting a higher interest rate, finding it difficult to find a lender who approves your application or even facing an outright denial for a loan.

Find Out Your Credit Score

So first thing, check your credit score. There are many sources for doing this but the best way is to go to myfico.com and buy it from there.

Fico credit score is the most common score used by most of the lenders.

Get Your Credit Reports

Next, pull your credit report from the three credit bureaus, TransUnion.com, Experian.com and  Equifax.com. You may be able to get all three credit reports from the website of a single credit bureau.

You are eligible for a free credit report from all the three main credit bureaus every 12 months. So if you haven’t already, go to www.annualcreditreport.com and get yours for free.

Examine your credit score

One of the good features of ordering your credit score is that it comes with a complete summary of the factors that are affecting it negatively. So if it’s late payments, unpaid debts, lack of depth you will know what it is.

A credit score is calculated according to a certain formula. While the exact formula is not known, it has been revealed that the following factors are used with a varying degree of importance.

  • Payment history – 35%, 
  • Balance – 30%, 
  • Length of credit – 15%, 
  • Enquiries – 10%, 
  • Types of credit – 10%.

It should be mentioned that a credit score takes into consideration when the consumer is shopping for the best possible loan option. He may apply for credit with various mortgage lenders resulting in multiple inquiries coming on the credit report. The credit score understands this. Which is why multiple inquiries made for the same kind of credit within a period of 14 days are treated as one.

Now that you know what affects your credit score, it’s time to start working on your accounts.

There are two important ways to improve your credit rating:  Bring unpaid and delinquent accounts in order and, by attempting to dispute other negative items from your report in an effort to having them erased from record.

Dispute items on our credit report.

  1. There may be various negative entries which might be removed from your credit report by the procedure of disputing. 
  2. Incorrect information such as a debt that has been paid off but is still getting reported as unpaid can be disputed. 
  3. Other entries can be removed by putting the burden of proof on the creditor.
  4. When you order a credit report you are also allowed to file a dispute either online or through postal mail. Filing a dispute online is as simple as logging in with the credentials provided to you.

For every dispute filed, the creditor is supposed to get back to the credit bureau within 30 days. If he doesn’t the entry has to be removed from the report. You can try this with the very old debts as the creditor is less likely to have  maintained the necessary paperwork to prove the debt. This is also the way to go for debts that you believe are not yours.

However, for the debts you own, the better approach is to settle them, if you can’t pay them back in full. 

The icing on the cake will be if somehow you can convince the creditor to report the debt as fully paid to the credit bureau. That will have a better impact on your credit rating than settled debts.

Basically, try to set as many factors right as possible.

It is generally believed and is commonly true that when people have a bad credit score, they are likely to be suffering from other money problems. 

For example if someone is late with credit card payments repeatedly, it cannot simply a case of forgetfulness each and every time. Similarly if one revolves a high amount of money on credit lines, it’s likely that the person is living beyond their means and is always a high-risk for default.

What we are trying to say is that improving your credit score is not about a quick fix. It is about fixing long-term issues and habits that are causing you to be in a bad credit situation.

You know the things that affect your credit score now. Therefore:

  • Get regular with payments.
  • Reduce the balance on your credit cards
  • Charge your credit cards, less than 50% of the credit limit.
  • Cancel additional credit cards you don’t use.
  • Don’t apply for too many lines of credit.
  • Maintain good transaction history for sometime if you have started using credit recently

With time, your credit rating will improve and you will be able to get better terms with your mortgage lender. Consider reading a good book, researching online and credit counselling if you feel your credit situation is out of control.