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6 Steps to Build or Repair Your Credit Before Buying a Home

Follow these 6 steps to build or repair your credit before house hunting so you get approved for a mortgage that costs as little as possible.

By
Laura Adams, MBA,
January 31, 2018
Episode #529

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6 Steps to Build or Repair Your Credit Before Buying a Home

Building credit is always important, but it’s critical before buying a home. Whether you’re a seasoned homeowner or a first-timer, your credit score is a primary factor that mortgage lenders consider when evaluating your application.

Not only does repairing and building credit help you get approved for a mortgage in the first place, it’s the key to locking in a low interest rate that saves huge amounts of money over the life of your loan.

For example, if you get a $200,000 fixed-rate mortgage with excellent credit, you’ll pay about $145,000 in interest with a 30-year loan. But if you have average credit, you’ll pay close to $190,000 in interest for the same loan.

Having less-than-stellar credit costs you $45,000 just in interest. Even if you sell your home before paying off the mortgage, having excellent credit translates into a monthly payment that’s $125 less than if you have average credit.  

If you invested $125 per month for retirement, instead of paying it to a mortgage lender, it could easily grow into a nest egg worth over $200,000 within 30 years. Small financial habits, like how you handle credit, really add up.

6 Steps to Build or Repair Your Credit Before Buying a Home

  1. Check your credit reports. 
  2. Correct any credit errors. 
  3. Deal with delinquent accounts.
  4. Cut your utilization ratio.
  5. Reduce your debt to income ratio. 
  6. Discuss your credit situation with lenders.

Follow these six steps to build or repair your credit before house hunting so you get approved for a mortgage that costs as little as possible.

1. Check your credit reports.

Since lenders put a lot of weight on your credit, you should be one step ahead of them by checking it first. Your credit scores are calculated entirely from data in your credit reports, so it’s critical to make sure that your credit reports don’t include any inaccurate information.

Your credit history is maintained by nationwide credit bureaus, including Equifax, Experian, and TransUnion. Unfortunately, most consumers have errors on their credit reports that go undetected for years because they’ve never taken the time to review them. 

Unfortunately, most consumers have errors on their credit reports that go undetected for years because they’ve never taken the time to review them.

You probably won’t know which of your credit reports a mortgage lender will examine, so it’s wise to review all three, especially if you’ve never reviewed them or it’s been a while. Plus, your credit files typically vary from bureau to bureau because not all creditors and merchants report your payment information to all three of them. They’re not required to submit data to credit agencies, and many will choose to just work with one of them.

You’re entitled to view or print each of your reports for free every 12 months at the official credit site, annualcreditreport.com. But don’t wait until the last minute—check your reports at least several months before you plan to apply for a mortgage. That gives you plenty of time to correct any mistakes, which I’ll cover in the next step.

And if you know there are black marks on your credit, such as late payments or accounts in collections, start making serious credit repair efforts at least six months in advance. And if you can wait a year before applying for a home loan, that’s an even better timeframe to whip your credit and finances into shape.

When reviewing your reports, carefully check every item including your name, Social Security Number, current and previous addresses, employers, public records, and accounts. And don’t be surprised to see old accounts in your file. Even loans that you’ve paid off or credit cards that you closed stay in your credit file for a certain amount of time:

  • Accounts with positive information remain on your credit report for at least 10 years and may remain indefinitely. 
  • Accounts with negative information, such as late payments or being in collections, stay on your credit report for seven years.

For each of your open credit accounts, verify the available credit limit, the outstanding loan amount, and any late payments. If all your personal and account information is accurate, you can skip the next step. But if you see any errors, get them corrected as quickly as possible.

Note that your credit scores are never listed in your credit reports. That’s because you don’t have one credit score—there are more than 100 credit-scoring models out there. Some rank you with a numerical score, and some assign a letter grade, like an A or B.

As I mentioned, scores are based on the data in your reports, which changes constantly as new data is added and old data is deleted. So, credit scores are a snapshot of your credit in time and you typically must purchase them from scoring companies or credit bureaus.

Mortgage lenders commonly use the FICO credit score, which ranges from a low of 300 to a high of 850. FICO scores over 760 are considered excellent and those under 620 are likely to be turned down for a home loan. You can buy your FICO score for about $20, or you may have a credit card that offers it for free, such as Discover.

There are other credit sites, such as Credit Sesame and Credit Karma, that offer credit reports and credit scores from a couple of bureaus, such as TransUnion and Equifax, for free. These scores may not be the ones that your potential mortgage lender will use, but they’re a good indicator of your overall credit health. Plus, these sites offer great tips for how to boost your credit and they even notify you when your scores move up or down.

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

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