Getting your credit score ready to apply for a mortgage can be an incredibly frustrating task, especially since no one really seems to understand the nebulous world of credit scores.
Jeff Harrison at Ohio Capital Mortgage has these tips for you, explained in detail in the Facebook Live video below the list. In the video, you will hear me reference another post regarding how your mortgage credit is not the same as the credit you might pull, and you may read/see that information here.
1. Have at least one open credit card. Revolving accounts are definitely the fastest, easiest way to build or boost a credit score. Regular credit cards or secured credit cards are equally effective. However, it’s not as simple as having one open and paying it as agreed.
2. Maintain a balance of less than 30% of the credit limit on any and all credit cards you have. Once you go above that amount, your credit card stops working for you and starts working against you. If you have ever been late on it, it’s even worse. A maxed out credit card can be as bad on your score as a 60 day late payment. If you have any balances above 30% of what you can borrow on a credit card, pay it down under 30% about 1-2 months before you apply for a mortgage if you are able.
3. Carry a balance of at least $10 on any credit card you have open. Think of credit as an indication of how desirable you are to lend to. If you have an open credit card but you are not using it, no one is making any interest off of you, so you are not as desirable to lend to! However, a small balance carried over from the previous month allows the creditor to charge a small amount of interest, which then increases your “desirability” as a borrower, so your score goes up.
4. This should go without saying, but pay anything you have open within 30 days of the due date. One payment over 30 days late can be murder on your credit score, especially if it is recent before the inquiry is made.
5. Do not pay off or settle collection accounts off before you apply for a mortgage. Credit scoring models view this as a kind of admission of guilt, and for that your score actually drops in the short run after you pay off a collection. There is one caveat to this-
6. Only pay off a collection if the collection agent agrees IN WRITING to DELETE the collection from your credit. If the collection is deleted, its as if it never happened and your score should go up considerably. Not all collection agents will do this, but it definitely does not hurt to ask. If they say they cannot do it, do not pay off or settle on the collection until after you get your mortgage.
7. Do not dispute anything on your credit with the credit reporting agencies until you get your mortgage. If a borrower has open disputes on their credit, the lender will often require the dispute to be resolved before they can close which can be a time consuming and sometimes expensive process.
8. Limit the amount of inquiries on your credit as much as possible for 120 days before you intend to buy your home. Inquiries can drop your score if you have more than a couple, especially if you have several types of inquiries within that amount of time (such as for a car, credit card, mortgage etc.) Do not shop for any other type of credit if you can help it for a few months before you apply for a mortgage.
BONUS TIP: Do not assume you have a good credit score just because you pay cars or other installment debt on time. You need at least one revolving account in most cases, installment debt doesn’t do as much your credit as you might think.