It’s time for this week’s hot topic. This week’s questions revolve around credit score and how to improve yours before applying for a mortgage.
This is an important subject I have covered before. However, I wanted to provide a source that not only answers these common questions, but that also links to other posts I have shared in one place. Hopefully, this will make gathering information an easier and less stressful task for you.
Simply put, your credit score is is a number that tells lenders your capacity to repay a loan. Before jumping right in, check out my post on why your credit score matters to mortgage lenders – and what to do about it.
Q: Prior to applying for a mortgage, what is the best way for a want-to-be homeowner to improve their credit score?
Check your credit score regularly and make sure you are not over-utilizing your credit. Your score should really be over 700, and you should have 2 active trade lines (examples are: credit card, loan, mortgage, cell phone). A good credit will help you qualify for lower interest rates, and perhaps get you a bigger mortgage than someone with low or no credit. When you apply for a mortgage, lenders check your credit score, along with your employment history, debt to income ratio and other factors to determine their potential risk. This is why having good credit is essential.
Q: What is the biggest myth surrounding credit score checks prior to applying for a mortgage?
Myth-a credit check is going to severely damage your credit. If your credit is low enough that with one check it becomes hard for you to get a mortgage, you weren’t going to get a mortgage in the first place. Usually, a credit check will temporarily drop your credit score by 3-4 points. If you are going to multiple banks on your own, this can have an impact. However, if you are working with a broker you will only get your credit checked once.
Q: What has the most impact on changing a potential homeowner’s credit score?
Most impactful would be over-leveraging available credit, missed or late payments, collections, bankruptcy, too many recent credit checks, and of course having no credit.
Q: What is one of the tools or strategies you recommend for improving credit scores prior to applying for a mortgage?
Check your credit on your own using Equifax or TransUnion to see where you stand. It will give you a good idea of your current situation and guide you on the steps you need to make to move forward. If the report is too complicated, ask your mortgage broker to go over it with you. If you don’t have any credit, you need to apply for a credit card/ loan as soon as possible in order to begin establishing credit. Remember if you are the secondary cardholder, then technically you have no credit of your own.
Q: In your experience, what are the biggest struggles you have seen want-to-be homeowners come up against in regards to their credit score?
A person’s credit is unique to their situation and their past. Some examples include registered collections like unpaid income tax, unpaid MSP, parking tickets (if they are public), an unpaid final cell phone bill, or something small like a store card balance that the clients didn’t even know they were carrying.
At the end of the day, improving your credit is not just possible, but fairly straight forward. Checking your credit report at least twice a year is a good way to monitor your accounts and improve your credit. Do you have more questions about your credit score, your report, and what you might qualify for? Reach out anytime!