14 Ways to Improve Your Credit Score to Qualify for a Mortgage

By Veronica Nguyen · Jan 29, 2015 · Mortgage

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Image courtesy of Flickr, Markus Spiering

To qualify for a mortgage your credit report and score is scrutinized by all lenders. Make the right moves and improve your credit score to qualify.

Applying for a mortgage can be a difficult experience if your credit score is low. Don't wait until you find your dream home only to hear that you don't qualify due to credit related issues, especially ones you could have fixed. Be proactive and prepare yourself with the following tips.

1. Don't Move Debt Around

Simply moving debt from one credit card to another while keeping your balance the same may negatively impact your score, especially if you close the account from where you moved your debt. Instead, keep paying your bills on time and bring the balance down to less than 30% of your total available credit.

2. If You Can't Pay Get Help

Life is unpredictable and unforeseen events can lead to debt, which only makes your situation worse! If you find yourself in a crunch and are unable to pay bills; contact a credit counselor to get help. Being proactive and asking for help goes a long way to show mortgage lenders that you're still being responsible despite tough life events.

3. Re-Build Your Credit History

If you filed for bankruptcy (Chapter 7 or 13) make sure you start fresh by getting a secure credit card to rebuild your credit history and score. Do this as quickly as you can because most lenders will want to see a minimum of two years of good credit history. A few lenders may approve you for a mortgage before the two year period; however it will cost you.

Note that a bankruptcy can stay on your credit report for up to 7 and 10 years. Be prepared to explain to your mortgage lender when they ask about it.

4. Check for Errors

Check your credit report from all three major credit bureaus (Experian, Equifax, and Transunion) to ensure there are no errors which may be negatively affect your credit score. By law you are allowed one free credit report upon your request annually from Annual Credit Report. Additionally, you may want to consider free credit monitoring companies such as credit.com or Credit Karma.

5. Rapid Rescore

If you applied for a home loan and are just a few points away from being approved, ask your lender about doing a rapid rescore. You'll provide updated credit documentation to update your credit history and rapidly "rescore" your credit. Additionally, you can even take new actions, such as paying down one of your credit cards, and then rapidly rescore your credit.

6. Don't Be Late On Your Bills No Matter What

Nearly all creditors have an automatic payment option you should be using. Unfortunate life events may cause you to miss a payment and knowing that an automatic payment will be made as a backup gives you the peace of mind to focus on more important matters.

If you miss a payment call your creditor immediately to remedy it before it's too late. Your payment pattern remains on your credit history for up to seven years.

7. The Less You Owe the Better, But Do Owe Something

Mortgage lenders prefer that your outstanding balance be 30% or less than your available credit. If you have a high balance plan on paying it down below 30%, and ideally less than 20%, before applying for a mortgage loan.

However, you don't want to have a zero balance because you actually need credit history to prove that you are credit worthy.

8. Don't Open Accounts Rapidly

Mortgage lenders want to see that you have a history of using credit responsibly. Therefore it's typically suggested that you have three different types of credit accounts open. However, if your credit is new, don't simply open new credit accounts rapidly as that will lower your average account age and therefore lower your credit score as a result.

9. Shop for Credit Within a Short Period of Time

Each time you apply for credit (even if you don't get it) an "inquiry" is recorded on your credit report. Generally speaking, inquiries will lower your credit score, but only if it's related to a new financial commitment. For example, an inquiry for a new credit card will lower your credit score. However, an inquiry for employment will not.

If you're rate shopping for a mortgage, auto or student loan, plan on doing it all within a 30 day window because these types of inquiries will be consolidated into one inquiry. On the other hand, if applying for a credit card, each and every inquiry will count.

10. Don't Open New Accounts Just to Improve Your Credit Mix

Although it's often recommended to have three different types of credit accounts open, don't do this just to improve your credit mix. Only open new accounts if it's something you need. In this case more is not always better.

11. Become an Authorized User

If you're new to the credit game, try becoming an authorized user on someone else's credit to improve your own credit, but only if their credit is good. One of the best people to ask to become an authorized user with is mom or dad. Again, just be sure they're on top of their own finances otherwise this strategy will backfire on you!

12. Increase Your Credit Limit

Ask your current creditors to increase your credit limit, and if they do, it will increase your credit score. When a current creditor increases the amount they're willing to extend you, this signals to other creditors that you're credit worthy, and it'll lower your outstanding balance %.

It's important that after receiving your credit limit increase that you don't use it. If you increase your debt then your outstanding balance % will increase and that'll defeat the purpose. Additionally, lenders use your debt to determine your debt-to-income ratio which compares your monthly debts to your income. Use this calculator to accurately determine your total debt-to-income ratio or click here for to learn more about DTI.

13. Remove Collections Which Have Been Paid Off

If you were previously sent to collections, but now have a stellar credit history, a good strategy is to write an appeal letter to the credit bureaus and creditors requesting them to remove past collections which have now been paid off. Your credit score will increase as a result if they agree.

14. Payoff Judgments and Liens

Liens and judgments can stay on your credit report for up to 10 years so make sure those are paid off and updated if you want to get approved for and close your mortgage loan. Almost all lenders require that judgments and liens be completely paid off and removed before funding your home loan.

Your Credit Score is a Reflection of Your Money Habits

Although not a perfect system, to mortgage lenders your credit score is a reflection of you and your ability (or inability) to honor a mortgage if they were to give you one. The good news is there is a clearly defined process of how you can correct and ensure your credit report is an accurate reflection of who you are.

You ultimately influence and shape what's in your credit report and how mortgage lenders will rate you. Click here to see what's in your credit report and what score you'll need to get approved for a mortgage.

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