If you’re thinking about buying a home soon, it may be worth spending some time getting your credit ready before you officially begin the process. Here are actions you can start taking now, some of which can improve your credit score relatively quickly.
1. Check your credit score and reports
Knowing where you stand is the first step to preparing your credit for a mortgage loan. You can check your credit score with the three national credit reporting agencies, and if it’s already in the 700s or higher, you may not need to make many changes before you apply for a preapproval.
But if your credit score is low enough that you risk getting approved with unfavorable terms or denied altogether, you’ll be better off waiting until you can make some improvements.
You can get a free copy of your credit report from each of the three national credit reporting agencies weekly at AnnualCreditReport.com through December 2023, then every 12 months after that.
Once you have your reports, read through them and watch for items you don’t recognize or you believe to be inaccurate. If you find any inaccuracies, you can ask your lender to update their information with the credit reporting agencies. You also have the right to dispute the items directly with the agencies. This process can improve your score quickly if it results in a negative item being removed.
2. Pay down debt
Paying off other debts can not only lower your debt-to-income ratio but also help improve your credit score. That’s especially the case if you have credit card debt.
Your credit utilization rate—how much credit card debt you have in relation to your total available credit—is an important factor in your credit score. While many credit experts recommend having a credit utilization of 30% or less, there is no hard-and-fast rule—the lower, the better.
Because your credit utilization rate is calculated each month when your credit card balances get reported to the credit bureaus, your credit score could respond quickly if you pay down high credit card balances.
3. Avoid applying for new credit
Virtually every time you apply for credit, the lender runs a hard inquiry on your credit report. In most cases, you’ll see your credit score drop by fewer than five points with one inquiry, if at all.
But if you have multiple inquiries in a short period, it could have a compounding effect and lower your credit score even more. (One exception is when you apply for several of the same type of loans, such as a mortgage or car loan, as a way to compare offers. If you do so in a short time period, all the inquiries will be grouped into one, limiting the impact on your credit score.)
Also keep in mind that adding new credit can increase your DTI, which is a crucial factor for mortgage lenders.
4. Consider waiting
If your credit report includes some significant negative items, such as a bankruptcy, collection account or repossession, it may take more time for your credit score to recover than from high credit card balances or one late payment. In this case, it may be a good idea to wait until you can build a more positive credit history before applying for a large loan.
Waiting could also be worthwhile when the housing market is hot, or if interest rates are on the rise. Depending on how much flexibility you have, you may benefit from waiting until the market cools off, giving buyers more leverage than sellers, or until interest rates start to decline again.
Think about more than just the loan terms
A mortgage is a long-term financial commitment. But getting into a home with less-than-perfect terms now can still make sense in certain situations.
If you live in an area where a mortgage payment would be cheaper than what you pay in rent, for example, even a loan with a slightly higher interest rate could save you money in the short term. And if owning your own home improves your overall quality of life, that could be worth paying a little more.
This story was produced by Experian and reviewed and distributed by Stacker Media.