Why Does My Credit Score Matter?

Get Mortgage Ready

Impact of your Credit Score on Homebuying

When you’re applying for a mortgage, your credit score has the most meaningful impact on the rates you’ll be offered. Typically, the higher your score, the lower the interest rates you could receive. Lenders will also look at your existing monthly obligations and your ability to repay those debts and decide whether or not they think you can afford an additional payment.

CREDIT SCORE BASICS

Most credit scores use the Fair Isaac Corporation (FICO) model, which grades consumers on a 300- to 850-point range, with a  higher score indicating lower to risk to the lender. Generally, a score of around 740 or higher on the FICO scale is considered a very good to exceptional score.

Does Interest Rate Really Matter?
How Much Does Credit Score Effect My Loan?

Credit

7 Steps to Mortgage Ready Credit

Step 1
Check Your Credit Reports

When you make your application, the mortgage lender looks for three main things for a pre-approval:

  • Steady Income
  • Down Payment
  • Solid Credit History

Checking your credit report will let you see if there’s anything that’s hurting your credit. There are 3 main credit bureaus that report your score: Equifax, Experian & TransUnion. Each can vary slightly based on different factors, so it’s best to check all three of them. You can request a free report from each one.

You can also check your credit score for free from resources like these:
  • AnnualCreditReport.com (Once a year)
  • Certain Credit cards and banks you use
    • FYI: These credit inquiries are considered “soft” pulls and won’t negatively impact your score.
    Step 1
    Step 2
    Dispute Inaccurate Information

    Sometimes simply correcting mistakes can help improve your score to get where you want to be. Misinformation can hurt your credit score (and raise your interest rate) or 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.

    Which Credit Report Errors can you dispute?
  • Payments reported late that were actually on time
  • Accounts that aren’t yours
  • Inaccurate credit limit/loan amount or account balance
  • Inaccurate creditor
  • Inaccurate account status, for example, an account status reported as past due when the account is actually current
    • Step 2
    Step 3
    Pay Off Delinquent Accounts
    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 seriously damage your chances of getting a mortgage. Pay off all accounts that are currently delinquent before putting in a mortgage application.
    Step 3
    Step 4
    Bury Delinquencies with Timely Payments
    You need to establish a pattern of timely payments in order to get approved for a mortgage and get a competitive interest rate. 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 for your credit score to adjust. The older the delinquency, the better your credit looks and the more money you can potentially save in the long term with a lower interest rate!
    Step 4
    Step 5
    Calculate Your Debt-to-Income (DTI) Ratio

    Divide total debt by total income to get DTI %
    Decode Your DTI Result
    Step 5
    Step 6
    Set a Budget & Reduce your Debt
    If you fall into any of the less-than-ideal DTI categories, your best next step is to set a budget and devise a financial strategy that you can stick to. First, identify and track how you’re currently spending your money. Then set your financial goals and create a budget around meeting those goals. Continue to track your spending to make sure you’re staying within your budget and eliminate any bad spending habits. You can make budgeting and identify where you over-spend simpler by using an app such as Mint.com or PersonalCapital.com. Once you’ve created your budget and know where your money is going, it’s time to start paying down your debt. A good tactic for dealing with debt is the Debt Snowball Plan.
    Step 6
    Step 7
    Don’t Create Any New Debt
    Once the mortgage application has begun, it’s imperative that you stay away from starting any new credit-based transactions until after you’ve gotten your mortgage. That includes applying for credit cards, buying a new car or major home purchases (like furniture or appliances). Make sure you don’t close any accounts, either. Discuss a full list of Do’s & Don’ts with your loan officer before your application to ensure no obstacles pop up during the mortgage process.
    Step 7

    Avoiding Credit Repair Scams

    Remember, improving your credit legitimately takes time and effort. It’s important to understand that there is no quick fix. However, you need to be aware of the multitude of companies out there who claim they can erase your credit problems completely.

    Make sure you recognize credit repair schemes before you become a victim.

    Red Flags to look out for:

    • If a company requires payment for services before they are provided to you. Under the Credit Repair Organization Act, companies cannot ask for payment until they have fulfilled the agreed-upon services.
    Is it a Scam?
    • If a company suggests that you do not contact any of the three major national credit reporting companies directly.
    • If a company tells you they can remove most or all of the negative information on your credit report, even if the information is correct.
    • If a company recommends you invent a “new” credit identity by applying for an Employer Identification Number rather than using your social security number.
    • If a company advises you to dispute all the information on your credit report, regardless of its accuracy.

    The Federal Trade Commission helps prevent fraudulent business practices in the marketplace. To file a complaint or get more information, visit www.ftc.gov.