One of the steps you need to complete when buying a home for the first time is prequalifying for a home loan. The process of prequalification involves sending financial details, such as savings and income information, to your mortgage lender.
Apart from that, the lender will check your credit score. If this number is too low, you won’t be able to obtain approval for a loan. Whether you’re applying for a mortgage in Salt Lake City, Los Angeles, or other areas in the country, getting a home loan is next to impossible if your credit score is less than 500.
If you want to qualify for a conventional mortgage, you’ll need a score of at least 620. Of course, the higher the credit score, the better for you, as you can secure favorable rates from your lender.
If your credit score is less-than-stellar, don’t fret. You can take these steps to boost your score and qualify for better mortgage interest rates:
Make On-Time Payments
According to Fair Isaac Corporation (FICO), a firm focused on credit scoring services, payment history makes up 35 percent of your credit score. Paying your credit card bill, electricity bill, car loan, and other financial obligations on time, every time can improve your score. Making these on-time payments shows you’re a responsible borrower. If you’re having difficulty paying on schedule due to a busy lifestyle, consider setting up automatic payments through your bank.
Minimize Your Debt-to-Income Ratio
A debt-to-income ratio is a measurement lenders use to determine your ability to manage periodic payments to repay your debt or loan. A high number spells trouble, as the mortgage underwriter may think you are unable to pay back your financial obligations. Keeping your debt-to-income ratio low, therefore, is necessary. Lenders prefer a ratio smaller than 36 percent. If you’re going to buy a home, opt for a “the lower ratio, the better” mindset.
Dispute Inaccurate Credit Report Information
Credit reports produced by credit bureau aren’t perfect all the time. A report from the Federal Trade Commission revealed 20 percent of American consumers have a mistake in one of their three credit reports. ; Any error in the report could negatively affect your credit score and may result in the rejection of your home loan application.
Once you’ve secured a copy of your credit report, carefully review the document and check for mistakes. A few of the errors that may be present in a report are incorrect account status, inaccurate address, and duplicate entries. If you find a mistake, follow the instructions provided by the credit bureau to figure out how you can properly dispute the error.
Avoid Taking on Any New Debt
Incurring new debt may cast suspicion on your financial stability. If you’ve decided to buy your first house, steer clear of new credit-based transactions until after the lender approves your home loan.
A boost in your credit score isn’t just beneficial when you’re getting a mortgage. It can also lower your insurance premiums and help you secure a fantastic rate on our consumer lending products, such as credit cards and auto loans. So take a few simple steps to improve your credit score.
Meta Title: Improve Your Credit Score before Purchasing a Home
Meta Description: An excellent credit score is necessary if you want to secure a home loan with a fantastic interest rate. Bump up this score with 4 simple steps.