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Jan 2017

How to Improve Your Credit for a Mortgage

When you’re going into the process of purchasing a home, one of the main factors that will impact how much you can afford to borrow for a home loan is your credit score. To some, a not-so-good credit score may sound like the end of the road to home buying, but this isn’t true. Yes, getting a mortgage could be hindered by a poor score, but you can turn that around and improve your credit with some help. Here’s what you need to know to get started.

The things that impact your score

FICO (Fair Isaac Corporation) is an independently operated company that’s not owned by any credit bureau. They own a formula that calculates a consumer’s credit score and also have several other score models available that can calculate your score based on a variety of factors. The FICO model is what determines the three-digit score that is on your credit report and calculates that score based on the following factors: Breakdown of FICO Score

  • 30% Amounts Owed

  • 10% Any New Credit, and period of time in which all new credit was opened

  • 15% Length of Credit History

  • 10% Mix of Credits: credit cards, loans, retail accounts, etc.

  • 35% Payment History

Understanding FICO score ranges

The categories above are determined by all your credit information and data. Most lenders who pull your credit will use the following score ranges to determine your level of risk. It’s important to keep in mind that your lender can work with you to offer various loan programs that could give you more flexible options if your credit is less than ideal.

  • 300-550: Generally considered poor credit. Your application for a home loan will likely be rejected, and it would be necessary to improve. You can work with a mortgage banker on getting yourself on the right path to do so.

  • 550-620: This range is considered subprime and it might be possible to get a home loan, but your interest rate and terms may not be exactly what you are hoping for. Again, it’s possible to first try and improve your score before applying for a home loan again.

  • 620-680: This is an acceptable range. If you’re in this range you’ll be considered a low risk for creditors and you could likely get a mortgage as long as all other criteria are met.

  • 680-740: Good credit range. You’ll likely always be approved for a home loan and other loans and may be eligible for good interest rates too.

  • 740-850: This is considered an excellent credit range. If you fall into this category then you will have a more than likely chance of getting a home loan with a good interest rates and terms.

Mortgage lenders' scoring model

As you may already know, each of the three credit reporting agencies let you check your credit score online for free once a year. But did you know the credit score you see may differ from what your mortgage lender sees?

Lenders use different scoring models to determine your risk, and they’re different across industries. For example, what an auto lender pulls may be different than what your mortgage lender pulls.

If you’ve gotten your credit score online or from a different lender (auto, personal loan, student loan), those scores can give you a general idea of where you stand. But keep in mind, it might not be the same number your mortgage lender will ultimately use.

What you can do to help improve it

Things you can do on your own

If you need to, or want to, improve your score, it’s necessary to know what may cause it to drop in the first place. Understanding where your challenges take place will help guide you in the right direction by knowing what to tackle. There are a few things that have a big impact on your credit score, based on the categories listed previously, which includes maxing out your credit cards, having missed payments, any negative items on your report (such as bankruptcy), the age of your credit accounts, not having a responsible mix of accounts, and credit inquiries — particularly hard pulls on credit. So to help you start improving your score:

  • Start off by checking your credit report. Know where you are so that you know what to work on.

  • Keep any balances that you have on your credit cards as low as possible. Pay off any of those balances in a timely manner and make sure, in general, to pay off debt instead of move it around.

  • If you’ve missed payments in the past and as a result have lowered your score, start by being more current on your payments, and then stay current. The longer you stay current, the more your score should increase.

  • Set up reminders to pay off any debts.

  • Don’t open up a bunch of credit accounts in a short-period of time. Also, don’t close unused credit cards in a short period of time. The age of your credit accounts is impactful on your score and closing accounts doesn’t make them go away.

  • If possible, try to have a good mix of different types of credit. Keep in mind that it’s important to be responsible with all the different credit accounts.

If you don’t have a credit history, there are ways to help you establish some responsibly. You can first try applying for a secured credit card, which is a credit line based on your income and the amount of it you put in a security deposit from where it will be charged. So, if you were to put $1,000 into it, you’ll only be able to charge up to $1,000 in most cases — some secured credit providers may allow a percentage more than what you deposit into it and there’s typically a minimum deposit that you need to put in. When you choose to close your account, you’ll receive your deposit back.

To help with having a mix of credit accounts, you can also apply for a credit-builder loan which is basically designed to help you build your credit. Think of it like a forced savings account, making you put money away each month that you will then get at the end.

If you’re not comfortable with getting an unsecured credit card or you’re not eligible yet on your own, you can possibly get an unsecured credit card by having someone co-sign for it. The co-signer should be aware that if you default on your payments, that they will be held just as responsible and be required to pay.

You can also become an authorized user on someone else’s credit card such as a family member or a spouse. But it’s best to first find out if that person’s credit card issuer even reports authorized user activity. If not, then it wouldn’t help you build your credit.

Those who can help guide you in improving your score

If you’re struggling to improve your credit and you’ve applied for a home loan, your mortgage banker may be able to help guide you in the right direction.

After your initial credit pull, mortgage bankers can suggest ways to improve your score and plan the right path for improving it to qualify for a mortgage.

Then, once you’ve applied their suggestions and have worked on your credit, they can re-score for your application. While it’s not guaranteed that your score will improve, a mortgage banker can point you in the right direction. As a last resort, you can reach out to credit specialists that specifically deal with poor credit as well as look into some credit repair workshops. Getting your credit squared away will significantly help with applying for a mortgage. Most importantly it will help you get a home loan that you can afford paying off and help you afford the house you’ve been eyeing.