How to Prepare Your Credit for a Mortgage Approval

If you’re eager to move into your dream home, preparing your credit for a mortgage approval should definitely be on your agenda. Laura gives six tips for building credit before you apply for a mortgage, so you get a loan that costs as little as possible.

Laura Adams, MBA
8-minute read
Episode #450

Tip #2: Correct credit report errors quickly

When you view or download your credit reports, check them for errors very carefully. Look for accounts that are not yours, incorrect account balances, misapplied late payments, or anything else you simply don’t recognize.

If you see a mistake, report it immediately. Credit investigations can take up to 45 days, so the earlier you submit a dispute the better. Each bureau is required to automatically notify the other 2 about disputes, so you only need to submit it once.

If you have old debt in collections, that’s a huge red flag to potential home lenders. They may deny your mortgage application altogether or quote you a high interest rate.

Consider paying off any past due balances or negotiating a settlement with your creditors. Arranging a lump sum payment or a monthly payment agreement won’t remove bad debt from your credit report, but it does help clean it up.

Even after you pay off a credit account, it stays on credit report for many years. Debts with positive payment history stay in your file for 10 years and those with negative information remain for 7 years after the date you originally became delinquent.

Even though debt in collections causes your credit scores to plummet, it can be overshadowed by newer, positive information over time. In other words, rebuilding your credit is a long-term endeavor and you may need to wait for your scores to rebound before buying a home if you want the best rate and terms.

See also: The Statute of Limitations and 4 Options for Old Debt

Tip #3: Understand what credit scores lenders want to see

When a mortgage lender orders your credit report, they can also purchase different types of credit scores. Scores help lenders summarize data in your credit report and easily evaluate the risk of doing business with you.

There are hundreds of different credit scoring models created by the credit bureaus and other companies. Two popular products for mortgage underwriting are FICO and VantageScore.

Each type of credit score uses a different score range and evaluates you differently.

Home buyers with a FICO score of 740 or above usually qualify for the best rates—but there’s no cutoff score or hard line used by all lenders.

For instance, the FICO score ranges from 300 to 850 and is calculated on these criteria and percentages:

  • Payment history: 35% 
  • Amounts owed: 30% 
  • Length of credit history: 15% 
  • New credit requests: 10% 
  • Types of credit accounts: 10%

Here’s what FICO scores mean to lenders:

  • 300 to 579: a very risky borrower 
  • 580 to 669: a somewhat risky borrower 
  • 670 to 739: an average to low risk borrower 
  • 740 to 799: a dependable borrower 
  • 800 to 850: an exceptional borrower

Home buyers with a FICO score of 740 or above usually qualify for the best rates—but there’s no cutoff score or hard line used by all lenders. Plus, there are additional factors used to determine your interest rate and loan terms, such as your income, job stability, and total debt.

An increasing number of companies, services, and apps are hopping on the “free credit score” bandwagon:

  • Credit Karma offers free credit reports and scores from TransUnion and Equifax 
  • Credit Sesame offers free credit reports and scores from TransUnion 
  • Quizzle offers free credit report from TransUnion and a free VantageScore credit score

Additionally, credit card issuers such as American Express, Chase, Citi, Discover, and Bank of America offer FICO or other types of scores for free with certain products. Find out which score(s) your preferred lenders use and get yours. Even if you have to pay $30 or $40 for it, it’s worthwhile to understand how you can improve your credit health ahead of a mortgage application.

See also: FICO vs. VantageScore Credit Score--What's the Big Difference?


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.