If you’re considering buying a new home, then you’re probably aware of the criteria that factors into obtaining a mortgage loan. However, one of the many standards that concern most individuals is the shape of their credit.
Your credit does affect your loan eligibility and rate, that’s why it’s important to take steps in order to improve your report/score before submitting an application.
Check out these 5 steps so that you can have confidence when applying for your next home loan!
1. Check your credit report
Okay, first things first, check your credit report. You’ve probably heard this advice many time, but there is a reason it is the first step you should take. Credit reports may have mistakes; in fact, according to a report by the Federal Trade Commission, 1 in 5 Americans have an error on their credit report. Those aren’t the best odds. Spending time once a year reviewing your report to confirm there are no errors can increase your score and ultimately save you money; better scores typically equal better rates.
2. Pay down your debt
You’ve probably heard of this little thing called debt-to-income ratio, and if you haven’t, get acquainted with this term. Basically, your debt-to-income ratio is the total of your monthly debt payments divided by your monthly gross income. The higher your ratio, the bigger risk you are to a mortgage lender because you’re less likely to be able to pay your monthly mortgage bill. Paying down debt and paying off collections will also be good for you in the long run because it’s less monthly payments you have to make on top of your mortgage.
3. Don’t over utilize your credit
No matter how high the limit is on your credit cards, utilizing a high percentage can have a negative impact on your credit. A good rule of thumb is to keep your utilization under 30%, so if you had a credit card with $1500 limit, you wouldn’t want to spend more than $450 at any given time. Also, if you can afford to pay off your credit cards in whole every month, that can help boost your score.
4. Diversify your credit lines
This may seem counterintuitive, but with responsible managing, having several forms of credit lines can improve your credit. A good mix of credit cards and loans that you make regular, on-time payments with low utilization shows lenders that you are responsible with your debt.
5. Get some credit
For many, the world of credit cards and personal loans seems daunting and scary, so they opt out of dealing with any form of credit at all. However, building a credit history is important if you plan on purchasing a home with a mortgage. The older your credit history the better, so start building soon. Secured cards and small loans are good starting places. If you’re still unsure, ask a financial professional for help.
If you already follow these steps, then you’re on the right track and may be ready to venture into home ownership. Check out our rate calculators and get your no obligation quote today!