Your credit score serves as a report card for your financial responsibility, so lenders use it to evaluate whether you are an ideal candidate for a home mortgage. Ensuring this number is as high as possible is critical, not only for home loan approval, but also to ensure you secure the lowest rate possible.
Know what to aim for
According to Bankrate, lenders will typically award the best interest rates to applicants with a credit score of 740 or higher. However, if your credit score is below 620, getting approved at all will be a monumental challenge.
Lenders look at several variables on the credit report: outstanding debt, the outstanding debt relative to the total available debt; the length of the credit history, and the pursuit of new credit – how many inquiries are on your report.
While a couple points might not seem like a big deal initially, even if it impacts your interest rate by as little as 1 percent, a higher score can save you hundreds of dollars over the life of the loan.
“The best way to ensure your score remains high and accurate is to know what it is throughout the year.”
Understand your options
While a higher credit score is better than a low one, it’s important to know your options. Bankrate noted hopeful homeowners who have low credit scores can qualify for a mortgage through the Federal Housing Administration.
If your score is lower, you may want to take advantage of an opportunity to explain your low score to present yourself as a less risky borrower. You can also improve your odds of approval by providing a larger down payment for a home or show your rental payment history to demonstrate your ability to stay on top of bills.
Stay on top of your score
The best way to ensure your score remains high and accurate is to know what it is throughout the year. You are entitled to one free copy of your credit report from the major credit bureaus each year.
If you notice any inaccurate items, act as soon as possible. Consider enlisting the help of a credit repair company as you prepare to present your case to the creditors and credit bureaus.
Reduce debt and set reminders
The best way to raise your score is to pay bills on time and in full whenever possible. My FICO suggested that you should have payment reminders to ensure you avoid missing deadlines or being late.
Because reducing the amount of debt you accumulate is critical, creating a plan and sticking to it can help you tackle this problem efficiently. Determine which lines of credit have the highest interest rate or the highest debt-to-limit ratio and focus your resources on those debts. However, after you have paid off a line of credit, do not close the account as it demonstrates your ability to pay off a debt.
Your credit score is a powerful number, so ensuring it is as high as possible when applying for a home loan is critical.