Improving Your Credit for a Mortgage Loan

young couple, new home, moving boxes, playing in boxes

Purchasing a home is the largest purchase most people will make, but the process isn't always easy. Because of this, it's vital to have all your ducks in a row, especially your credit. If your credit isn't up to par, it can result in a less favorable interest rate or possibly a declined application. Here are some steps you can take to improve your credit for a mortgage loan so you don’t have to settle for either of those options:

Be Aware

You can’t fix what you don’t know is broken, and contrary to popular belief, what you don't know can hurt you. For example, if your credit has incorrect information on it that you are not aware of, it could result in you paying hundreds of extra dollars per month in interest alone. Before you start the mortgage process, it is important you understand what is on your credit report. Go through it carefully, looking for discrepancies such as different ways of listing your address, and clerical errors, such as duplicate listing of accounts or closed accounts marked as open. Make sure everything is accurate and up to date, and question lenders regarding anything that isn’t. Monitoring your credit score and credit report will keep you informed of your progress or any digressions.

Get Goodwill

After you learn of any negative or incorrect items on your credit, the next step is to have those items removed from your credit report. Removing incorrect and negative items can greatly increase your credit score. Pay special attention to collections accounts, late payments, and charge-offs. One way to have these items removed is by writing a goodwill letter to each of the original creditors of those negative items. It's important to determine the original creditor because debt is often transferred to another company, such as a collection agency.

The goodwill letter should explain the circumstances that led to the negative remark on your credit report. Then, explain to the creditor that you are attempting to apply for a mortgage loan. Ask them to remove the item from your credit report and to forgive the debt. While this may sound far-fetched, it can actually work. The best way to draft a forgiveness/goodwill letter is to search online for an example or template and personalize it to your unique situation from there. It's important to keep in mind that this process takes time, and can range from one to a few months.

Get Credit Card Balances Below 30%

One of the top factors affecting your credit score is your credit card usage. If even one of your credit cards is close to the limit, it's still important to get it paid down. A good rule of thumb is to keep your credit card balances below 30% of your total available credit. There are several different calculators you can use to determine where you stand with your usage ratio. In the event you have multiple credit cards with a high usage rate, it may be best to consolidate your credit card debt. Consider a balance transfer to help you pay off your existing credit card balances faster at a lower, more manageable rate.

Pay on Time, Every Time

Lenders need to be able to prove that you’re a reliable and responsible borrower before agreeing to give you a loan. Late or missed payments can stay on your credit report for at least six years, which will make lenders less likely to trust that you can pay back your loan. Stay within the agreed credit limits, and always make your payments on time. If you can’t pay in full, pay as much over the minimum required payment as you can.

Do Not Apply for Any New Credit Cards or Loans

Avoid applying for new credit during the process of getting a new mortgage. This means you shouldn't apply for a new car loan, credit card, or anything else. Any attempt you make to open up a new credit card or new loan will appear on your credit report as a hard inquiry. Hard inquiries essentially communicate to lenders that you are looking for new loans, which can be a major deterrent to a mortgage lender if you are trying to open up new loans while also going through the process of getting a mortgage. It is best to wait until the mortgage has closed on the new home before you apply for any additional new loans.

Getting your credit in order will help you tremendously when applying for a mortgage. Most importantly, it will help you get a loan for your dream home that you can actually afford to pay off. Robins Financial offers mortgage loans with quick closings and competitive rates, and expertise to help you with the decisions you’ll make along the way. If you’re ready to start the mortgage process, you can make an appointment to speak with one of our mortgage specialists or apply for a mortgage loan online today.

Not sure if you’re ready to buy a house? Want to see how much home you can afford and what your monthly payments might look like? Check out our Home Buying Calculators to help you find the answers to these questions and more. And visit our YouTube channel to watch our Home Buying video series where we walk you through every step of the home buying process from start to finish.

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