Improving Credit for a Home Loan

a couple speaking to real estate agent about mortgage credit scores and loans
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To receive the best mortgage interest rate it is important to prepare your credit for the loan application. Cleaning up your credit report and increasing your credit score will improve your chances of getting approved. If your credit’s already good, maintaining it will be key in locking in a low-interest rate.

Check Your Credit Reports

When you make your application, the mortgage lender will look for three main things. The first is that you—and your spouse if you apply jointly—have a steady income. The next consideration will be in how much of a down payment you can make. The final piece is if you have a solid credit history.

Checking your credit report will let you see if there’s anything that’s hurting your credit. You never know which credit report the bank will pull, so make sure you check all three of them, Experian, Equifax, and TransUnion.

You can get a free copy of all three credit reports at "AnnualCreditReport.com."

Dispute Inaccurate Information

Carefully review your listed credit history. Any misinformation can hurt your credit score and get your application denied. Get rid of any inaccurate information by disputing it with the credit bureau. If you have proof of the mistake, providing it will help ensure the mistake is removed from your report.

Pay Off Delinquent Accounts 

Make sure to keep all payments to other creditors current and timely. Delinquent accounts include any late accounts, charge-offs, bills in collection, and judgments. Mortgage lenders need to be convinced that you’ll make your payments on time.

Outstanding delinquencies will kill your chances of getting a mortgage. Pay off all accounts that are currently delinquent before putting in a mortgage application.

Bury Delinquencies with Timely Payments

You need to establish a pattern of the ability to make timely payments to get approved for a mortgage. The better your history, the better and more competitive the interest rate you will receive on your mortgage.

If you have a recent late payment—or you've just paid off some delinquencies—wait at least six months before applying for a mortgage. This six-month time will allow the older delinquency to look less damaging and give your credit score time to build back up again.

Reduce Your Debt-to-Income Ratio

Your bank's mortgage underwriter will question your ability to make your mortgage payments if you have a high level of debt relative to your income. Bring your monthly debt payments to at most 12% of your income—the lower, the better.

After you get a mortgage, your debt-to-income ratio will skyrocket, but shouldn't be higher than 43% of your income. Watch that you are not overspending your income by buying a larger home than you can comfortably afford.

Check Your FICO Score

Order your Equifax and TransUnion FICO Scores from "myFICO.com" to get an idea of where your credit stands. Your FICO score should be at least 720 to get a good interest rate on a loan.

If your score is lower than that, read through the included analysis to find out what’s bringing your score down. Although lenders still use it, Experian no longer allows consumers to purchase a FICO score based Experian credit report data. If you want to get an idea of your Experian credit score, you can purchase a VantageScore or buy a three-in-one credit score from Equifax or TransUnion.

Don't Incur Any New Debt

Taking on new debt can make a mortgage lender suspicious of your financial stability—even if your debt level stays below 12% of your income. It’s best to stay away from any new credit-based transactions until after you’ve got your mortgage secured.

That includes applying for credit cards, especially since credit inquiries affect your credit score.