There are a lot of numbers that impact your homebuying search and getting approved for a mortgage. None is likely more important than your credit score.
These three digits tell mortgage lenders how you manage your income and debts, and how likely you will be to make your housing payments on time. In essence, are you worth their risk?
There are a number of factors that go into that risk assessment. Your credit score is comprised of:
- Whether you pay your bills on time
- How much of your available credit you are using
- How long your credit accounts have been open
- What type of credit accounts you have
- How often and how recently you applied for new credit accounts
Keep in mind that there are many tools out there to estimate your credit score, but they may not be as accurate as an official credit report that your lender will pull from the credit agencies. Often, your actual credit score will be lower than what you might see through your online banking app or online credit estimators. And once you pull your credit report, there’s always the possibility that it will show some past financial mistakes.
But don’t let that discourage you. If your score is lower than you thought, or lower than you would like it to be, there are ways to improve it before applying for a loan:
Make Sure Your Credit Report Is Correct.
Mistakes happen, even on credit reports. You may be able to have incorrect information corrected by the credit reporting agency or the company reporting the debt. But beware of using credit repair services that may not be reputable.
Talk to your lender.
Sometimes what you think will help your score the most actually won’t. An experienced mortgage lender will know exactly what steps you should take to boost your credit, whether paying down your debt or boosting your cash on hand.
Avoid big purchases.
Opening a new credit card or buying a new car is a big mistake while you are in the middle of a home purchase. But large purchases in the months leading up to obtaining a mortgage can impact you as well by raising your debt-to-income ratio or using more of your available credit. If these purchases are optional, hold off on big-ticket items until after your home purchase is complete.
Build your credit knowledge.
Freddie Mac has developed two free tools that consumers can use to take control of their credit. Both are available online and can be completed at your own pace.
The first, CreditSmart Essentials, is a general overview that will teach you about money management, maintaining and using credit and setting financial goals. There are 5 different learning paths to choose from and an online tracker to chart your progress.
