Improving your Credit Score to Secure the Best Mortgage
While there are many factors that impact your ability to qualify for a conventional mortgage, your FICO credit score not only makes a difference for an approval but also affects your mortgage rate. Lenders use risk-based pricing for conventional mortgage rates, which means the lowest mortgage rates are reserved for people with the highest credit scores. Here are 5 tips to help you boost that credit score and get the best possible rate!
1. Review your credit report thoroughly
Job one is to know where you stand with your credit score, and you're entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Order online from annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228. Check your free credit report carefully - it could help you boost your score. Why? It's common for banks, lenders and credit companies to make a mistake. If you spot any accounts that you don't recognize, dates that don't seem to match up, and especially if you see any mention of late payments or penalties, make certain they have been recorded correctly - and don't be afraid to call the company in question for details. After all, it's better to spend a few minutes on the phone clearing something up than leave a mistake on the report that could adversely affect your credit record. That phone call could wind up boosting your credit score - and it only takes a few minutes of your time.
2. Pay Off Delinquent Accounts
Delinquent accounts include any late accounts, charge-offs, bills in collection, and judgments. Mortgage lenders need to be convinced that you’ll make your payments on time. Outstanding delinquencies can lower your chances of getting a mortgage significantly. Bring past-due accounts current and make all future payments on time before putting in a mortgage application.
3. Reduce Your Debt-to-Income Ratio
Your mortgage underwriter will question your ability to make your mortgage payments if you have a high level of debt relative to your income. Bring your monthly debt payments to at most 12% of your income – the lower, the better. After you get a mortgage, your debt-to-income ratio will skyrocket, but shouldn't be higher than 43% of your income.
4. Set up automatic payments
Given that payment history accounts for 35% of your overall credit score, you need to establish a pattern of timely payments to get approved for a mortgage and get a competitive interest rate. The more payments you make, and the earlier you make them, the more it helps boost your credit score. To keep that momentum going, set up automatic payments with lenders and creditors and ask for bill payment deadline alerts from them, as well. This is especially helpful if you're having trouble paying your bills on time.
5. Don't Incur Any New Debt
One of the most important tips especially before or during the mortgage loan process is NOT taking on new debt which can make a mortgage lender suspicious of your financial stability. To them, that means you're taking on more debt, and may have problems paying it all off. By keeping your open, active credit and loan accounts to a minimum, you’ll keep your credit score on an upward path. It’s best to stay away from any new credit-based transactions until after you’ve got your mortgage. That includes applying for credit cards, especially since credit inquiries affect your credit score.
At American Freedom Funding our mission is to serve our customers with honesty, integrity, and competence. Our goal is to provide home loans to our clients while providing them with the lowest interest rates and closing costs possible. Furthermore, we pledge to help borrowers overcome roadblocks that can arise while securing a loan. We are here with you and for you!