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Real Estate Tips

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7 Steps to Improve Your Credit Score for Your First Mortgage

If you’re like 63% of current homeowners, you’re going to finance your home with a mortgage. That means your lender will give you a set amount of money to purchase your home, and you will agree to pay back the loan plus interest over a set period of years. That interest rate is dependent on current market rates and your risk level as a borrower. While you can’t control the market, you do have some control over how your lender views you as a borrower. That’s where your credit score comes in.

Your credit score (also called a FICO score) is a calculated number based on your credit history that lenders use to evaluate your creditworthiness. In other words, lenders use your credit score to assess the probability that you will repay your loan.

Follow these steps to increase your credit score so you can get the best possible interest rate on your mortgage:

 

Step 1: Check Your Credit Score

The 3 major U.S. credit bureaus (Experian, Equifax, and TransUnion) each release their own credit scores and reports. Each pull from slightly different sources, but the scores should be roughly equivalent.

Annualcreditreport.com will provide you a free copy of your credit report from each of those companies once every 12 months. However, while your report provides the details that make up your credit score, it does not contain your actual score. You will have to go to each company individually and pay a small fee to access your score. Check with your credit card company first to see if they offer free access to scores and reports.

 

Step 2. Assess Your Standing   

Your score can range from 300 to 850. The Federal Housing Administration requires a score of 500 or higher to buy a home with an FHA loan, but many other major lenders often require a score of 620 or higher.

However, you don’t want to stop there. The higher the score, the more financially trustworthy the person is considered. Lenders want to know you will pay off your loan in a timely manner. That’s why a higher credit score means a better interest rate on your mortgage. 

Here is the average score range:

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579
Unhappy with where you stand? Follow the next steps to improve.


Step 3. Pay On Time   

Your payment history makes up 35% of your FICO score. That’s more than any other category, so it’s incredibly important to pay your bills on time. Consider creating a budget to help you manage your expenses and signing up for automatic bill pay so you can be sure your bills are paid on time.

 

Step 4. Check for Errors   

Up to 5% of credit reports may contain errors that incorrectly lower your score. Examine your report in detail, and if you see an error, file a dispute with the bureau. Then, contact the organization that provided the incorrect data and request they update the info with the bureau.


Step 5. Erase Accidents   

Everyone makes mistakes, including making a late payment or two. If you have a history of late payments, there’s nothing you can do except improve going forward, but if you’ve only made a couple of late payments, call the company you paid late and ask them to remove it from your record.


Step 6. Increase Your Limit

One of the most obvious ways to increase your credit score is to pay off your debts, but if that’s not an option right now, ask your credit card company to increase your credit limit. This will give you a lower credit utilization rate, also known as your debt to credit ratio. Just be sure not to spend the extra amount!

 

Step 7. Be Patient

Unfortunately, negative items can remain on your report for up to 7 years. However, that doesn’t mean your credit score can’t increase during that time by taking the above steps. For example, it only takes 6 months of on-time payments to see a noticeable difference in your score. The sooner you start improving your habits, the sooner your score will improve.