November 5th, 2019 7:37 AM by Jackie A. Graves, President
How to prepare your credit for a mortgage to get the best
possible rate and save thousands
There's no question that buying a home is
a big investment. For many people, it's one of the biggest investments they'll
ever make. The decisions you make before you purchase a home can have
far-reaching, long-lasting financial effects.
You probably want to choose a home in a thriving market, where
property values will hopefully rise over time. You may be weighing options
including school districts, square footage, and neighborhood amenities.
However, you should also take the time to consider another very
important factor before you buy — how your credit will impact the cost of your
Just because your credit is good enough to qualify for a
mortgage doesn't mean you should simply accept a loan offer and move forward.
Often, improving your credit could result in a significant savings opportunity.
Keep reading for six ways you can get your credit into tip-top
shape for your upcoming home loan.
Although there are some ways to potentially improve credit scores quickly,
most credit improvement strategies require time and patience. For that reason,
it's important to start working on your credit as soon as possible before you apply for a new mortgage (or
any other type of financing).
Lenders set different credit score
thresholds when they price loans. For example:
When you move up from one credit score range into another, the
lender may offer you a lower interest rate. That can save you money, especially
with a larger loan like a mortgage. The more time you have to try to get your
scores to climb, the more money you stand to save.
Before you apply for a mortgage, it's important to review all three of your
credit reports from Equifax, TransUnion, and Experian. You can claim
a free copy of each report once every 12 months from AnnualCreditReport.com.
It's also a good idea to take a look at your FICO Score from each credit
bureau too, since these are the credit scores your mortgage
lender will review when you fill out your loan application.
If you discover any errors on your credit reports, you'll want
to alert the credit reporting agencies involved right away. It can take between
30 and 45 days to investigate a credit dispute (depending
upon whether you send in supplemental information). Plus, if the outcome of the
first investigation doesn't go your way, you may have to try again or try
another approach all together to correct the problem.
Did you know that high outstanding credit card balances could
hurt your credit scores even if you make every monthly payment on time?
Technically, it's a high credit utilization on your credit cards that may
damage your scores, but that high utilization comes from large balances in
relation to your credit card limits.
The good news is that by paying down your credit card balances,
you can reduce your credit utilization ratio. This may have a positive impact
on your credit scores, once the new card balances are updated on your credit
Is your credit history a little on the thin side? If so, you
might benefit from having a friend or family member add you onto an existing
credit card account as an authorized user — provided the account doesn't have
any negative payment history or a high utilization rate.
When your loved one adds you as an authorized user, most credit
card issuers will report the account to your credit report. So, if the account
has been paid on time and has a low balance-to-limit ratio, your scores could
benefit from the addition of the well-managed account to your credit reports.
On-time payments are an important key to both earning and
keeping good credit scores. In fact, over one-third of your FICO Scores are
calculated based on the payment history of the accounts on your credit reports.
Do you have recent late payments on your credit reports? If so,
it's generally a good idea to let some time pass (perhaps six to 12
months) before you fill out a mortgage application.
Late payments impact your credit scores the most negatively when
they first occur. Then, as time passes, they become less detrimental. The older
a late payment becomes, the better from a scoring perspective.
When a lender checks your credit as part of an application a
record of the credit pull, known as a hard inquiry, is placed on your credit
report. That hard inquiry has the potential to impact your credit scores for 12
This doesn't mean that every time a lender pulls your credit
it's going to hurt your scores, but there's a chance it could. As such, it's a
good idea to put the brakes on any non-essential new credit applications if you
know you plan to purchase a home in the near future.
Taking the time to earn a good credit score could save you tens
of thousands of dollars in interest over the life of a 30-year mortgage. That's
not an exaggeration.
Here's a real-life example of the difference between taking out
a $250,000 mortgage with a credit score of 639 and a credit score of 760,
calculated with the MyFICO Loan Savings Calculator:
Alyssa Powell/Business Insider
In the example above, you could save $230 per month and $82,832
in total interest by working hard to improve your credit score 121
Granted, jumping from a FICO Score of 639 to 760 is no small
feat. It could realistically take years of hard work to accomplish such a goal.
Thankfully, there are incremental savings opportunities along the way.
Whether you're buying a home for the first time or just the
first time in a while, it's easy get swept up in the excitement and be tempted
to move quickly. But ignoring the important role your credit plays in the cost
of your mortgage (and your ability to qualify in the first place) is a mistake.
Take your time and prepare your credit to the best of your
ability before you apply. Your hard work could pay off and save you a lot of
money in the long run.
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