If you plan to buy a home in the coming year; taking steps now to spruce up your credit report can significantly increase your chances of qualifying for a mortgage.
It’s important to remember that when lenders are deciding if they want to do business with you, they typically begin with a review of your credit report. This is a valuable document when you are applying for a mortgage and is one that as a mortgage broker we can help you gain access to. When submitting a mortgage application, they’ll check your credit report and the credit scores derived from those reports. Mortgage lenders use this credit information to help decide whether they’re willing to issue you a home loan; and if so, how much they’re willing to lend you.
We understand that a mortgage could be the largest financial decision a person ever makes. That’s why it’s key to prepare for a mortgage application by reviewing your credit report yourself, and taking steps to present it in the most favourable way.
Check your credit report and scores
- High account balances relative to your credit limits. Paying down your balances will help your credit scores.
- Past-due accounts, charge-offs and accounts in collections. If possible, bring all accounts current and pay off any outstanding collection accounts.
- Loans or credit accounts that shouldn’t be there, and payments incorrectly listed as late or missed. If any inaccuracy exists, speak to someone as soon as you can about this.
A credit score distills the contents of your credit report into a three-digit number. So, if there are improvements made in your reports; your score will likely increase once that information is reported to the credit bureaus. Credit scores play an important role in determining whether you qualify for a mortgage; lenders may decline applications from individuals whose credit scores are too low but this is something that a mortgage broker will discuss with you. Lenders also use credit scores to help set the interest rates they charge, with higher credit scores typically translating into lower interest rates.
The above suggestions can help you focus on how to make moves to improve your scores in the months ahead. It’s also wise to be mindful of the main factors that affect all credit scores, and to adopt habits that tend to promote score improvement. When preparing to apply for a mortgage, the following steps are generally advisable to all borrowers.
Steer away from applying for new credit and limit big purchases
Anytime you apply for new credit or take on new debt, the statistical risk that you’ll fail to repay your debts as it’s perceived by lenders and credit scoring models tends to climb. Therefore, for that reason, a credit check associated with a credit or loan application could cause your credit scores to drop slightly, although they may not drop at all. Scores also tend to dip when you accept a new loan or credit offer. These reductions are commonly just a few points each, and scores typically recover within a few months as long as you keep responsibly managing your credit. However, even slight drops should be avoided when you’re preparing your credit report for a mortgage.
Try to reduce credit card debt
If avoiding new debt helps smooth out your credit; it’s probably no surprise to learn that lowering existing debt can also help your credit standing. Paying off credit card balances is a great way to address this. Although paying them off altogether is an ideal goal; it isn’t always feasible within the span of a year or less. In that case, it’s wise to be strategic about which balances to tackle when paying off your credit cards.
Paying bills on time
In the words of LunchMoney Lewis – “I got bills I gotta pay” and we all have; but late payments, especially recent late ones can significantly drag down your credit scores. So in the months leading up to a mortgage application, make sure to pay every bill on time.
How else can I improve the odds of getting a mortgage?
Whilst your credit report is a key factor in determining your ability to get a mortgage; but it’s not the only influence. Some other approaches you can take to boost your chances of mortgage success include:
- Save for a larger deposit
- Resist looking at houses that you can’t afford
- Consider using a mortgage broker
