5 Tips To Improve Your Credit Score When Buying a Home

Considering a new home? Here are 5 tips to improve your credit score when buying a home in order to qualify for a mortgage loan in no time. With the new year just a few short weeks in, now is the time to get your finances and credit score in order. This will ensure that you are pre-approved before you begin your hunt for the perfect home.

Tip #1  – Know What Lenders Look For

Now is the time to improve your credit score when buying a home. You should know what Lenders look for when preparing your preapproval letter. This would include such things as income, job history, residential history, assets, debt-to-income ratio, and of course, credit score.

The first step in being qualified for a mortgage loan is to get a preapproved letter. This preapproval gives you a good idea of how much house you can afford, your interest rate and the type of loan programs you qualify for. A mortgage preapproval also let sellers and real estate agents know that you will not have trouble finding funding for your home purchase. In this process the Lenders are looking to see what type of debt you currently have. How responsibly you have been with those debts and can you comfortably take on any new debt.

Tip #2 – Documents Needed to Get a Mortgage

In order to move forward with the preapproval process you will need to submit certain financial documents to your mortgage lender. These are the documents they will use to validate your credit worthiness.

These required documents include:

• Proof of identification (e.g., a government-issued ID, driver’s license or passport)
• Your last 2 months of income (e.g., pay stubs, bank statements, etc.)
• Proof of funds for the down payment and closing
• Your last 2 years of tax returns, bank statements or investment account statements
• A recommendation letter

 

Tip # 3 – Grab A Fresh Copy (5 Tips To Improve Your Credit Score When Buying a Home)

The first step in gathering all your documents is to order a fresh copy of your credit report from one of the major agencies. The Fair Credit Reporting Act allows you to access a free copy of your credit report once every 12 months. So, if you have not ordered a copy recently, it is time to do so. You can access this free service through AnnualCreditReport.com, which is a website recommended by the Federal Trade Commission.

Note that it’s not recommended to use a search engine to search for “free credit report” or similar search terms. There are many impostor websites looking to obtain your personal financial information for nefarious purposes. Instead, stick with the government-recommended website listed above.

 

Tip #4 – Clean Up Anything Outstanding

Now that you have a copy of your credit report, it is time to go through it, line-by-line. You should recognize every current and outstanding account in the report. Any balances owing should be in order and reflect how much you owe. It’s critical that you flag any mistakes or old debts that you have already paid in full. If you come across anything that should not be on your credit report, call the reporting agency to let them know. If necessary, they will assist you with challenging the issue.

 

Tip #5 – Pay Down Those High-Interest Debts (5 Tips To Improve Your Credit Score When Buying a New Home)

A great tip to improve your credit score when buying a new home is to eliminate (or minimize) your current debt as quickly as possible. Therefore, the final tip in today’s guide is to prioritize your outstanding debts so that you can pay them off more efficiently. The essential debt payments are your mandatory minimums, which you need to pay to avoid being sent to a collection agency. From there, try to pay off your debts with the highest interest rates first. Getting these paid off faster means that over time, you’re spending less on interest payments. Moreover, you can use that extra cash to pay your debts down further.

 

Related Post: 4 Essential Tips on Buying Profitable Rental Property

 

Bottom Line  (5 Tips To Improve Your Credit Score When Buying a New Home)

The above are just a few of the action steps that you can take today to improve your credit score when buying a new home. This include getting a copy of your credit report to ensure it is accurate and up to date. This also give you an opportunity to address any issues before you approach a mortgage lender.

Secondly, you want to pay down on your current debt as much as you possible can.  This puts you in a lower debt-to-income ratio which helps you to qualify for that mortgage loan. Most lenders like to see a debt-to-income ratio of less than 50%. If your DTI ratio is more than 50%, you may want to take some time to pay down debt before you apply for a mortgage.

To calculate your debt-to-income ratio, divide your total monthly debts by your total monthly pre-tax income. For example, if your total monthly household income is $5,000 and you pay $2,000 a month in recurring expenses, your DTI ratio is 0.40, or 40%. Your mortgage lender will advise more on this issue.

Lastly, ensure you have all the documents needed to assist you in the pre-approval process. This include tax returns, pay stubs, government ID, etc.  You also want to ensure that you have a certain amount of money in the bank that will be used for closing on your loan.  In this day and age, typically anything over $5,000 is a good start.

When you’re ready to discuss a mortgage for your new home, give your local mortgage firm a call. They will be happy to advise you on the mortgage offer that suits your needs, budget and credit.

 

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