If you’re thinking about getting a mortgage loan in the next six months, it’s time to check on your credit score.
Your credit score is the single most important factor in determining the percentage rate of your loan. The higher the credit score, the lower the interest rate. Over the life of a loan, this can mean thousands of dollars in interest. So how can you increase your credit score?
First, you need to get your credit report. Many credit cards, such as Capital One, offer this service for free as well as Credit Karma. Carefully, line by line, go through and look at each item. Is there a medical bill that went into collections? I’ve often seen this happen with workmen’s comp claims in which the person was unaware that the bill even existed. I’ve also seen medical companies report this erroneously on people’s credit, and it can take months to get it cleared.
You may notice that you have credit cards you haven’t used in a long time. Don’t close them! Credit agencies look at the percentage of credit you’re using of your total available credit. Make sure that percentage is very low. If you have $20,000 in available credit and you’re using $2,000 of that, then you’re using 10%. However, if you close $5,000 worth of available credit now that $2,000 represents 13% of your available credit. If you want to cancel any credit cards, wait until after you have closed the loan on your new home.
Don’t open any new credit cards. Instead, take a hard look at the credit you’re already using and work over that six-month period to pay down balances.
Do not buy big-ticket items, such as a car or expensive furniture, that needs financing. This will drive up your debt ratio and make it harder for you to secure a loan.
Finally, if you need more specific advice on improving your score, give me a call. I’ve coached dozens of borrows over the years on how to increase their score and be mortgage ready. In my next blog, we’ll take a look at how student loans affect a person’s ability to secure a home loan.