What is just as valuable as gold? Your credit score! Mortgage lenders use your credit score to determine if you’re a good risk for loaning money. It’s also used to determine what interest rate to charge.
Another way of looking at it is that your credit score reflects the confidence lenders have in loaning money to you.
Of course, every person who applies for a mortgage loan should have a good credit score to receive the best interest rate and terms.
What’s defined as a good score varies slightly from creditor to creditor, but here’s a general overview.
- Excellent credit score-750-850
- Good credit score-700-749
- Fair credit score-650-699
- Poor credit score-649 and lower
As a first foray into homeownership, first time buyers are often not aware that there are five credit mistakes that can wreck your chance to become a homeowner.
Here they are and suggestions for how to repair the damage.
You Have a History of Missing or Late Payment
Have you missed a bill payment? Made a late payment? Have you had any previous loan defaults or tax liens? All of these are red flags to a lender.
Building good credit means paying your balance on time. Setting up automatic payments is a good choice to ensure you’re never late.
Bottom line, pay your bills on time to avoid this mistake!
You Have a Spotty or Short Credit History
Even if you have old credit cards you don’t use much, keep them open. Closing those accounts can actually harm your credit score because it reduces the length of your credit history.
When applying for a mortgage loan, your lender wants to see at least 24 months of credit history. If your credit history is spotty or short, consider waiting until it reflects a strong history of on-time payments.
You Have High Credit Balance
For example, if you have a $5,000 credit card limit, but you use $2,000 of it instead of maxing out your credit limit. This will help you to build a better credit score.
The lower you can keep your outstanding balances, the better for your credit score. If paying your credit cards on time is challenging to you, set up alerts to remind you.
You Have Too Much New Credit
For lenders, this is a signal that you have difficulty managing credit. Additionally, opening new credit lines decreases the overall average length of your credit history. That can hurt your score, too.
When applying for a mortgage loan, 10% of your credit score depends on not having new lines of credit. Avoid it!
You Have a Limited Mix of Credit
Having a good credit mix demonstrates your ability to pay off different types of debt at one time. That said, don’t take on more credit card or loan debt simply for the sake of having a good credit mix, if you can’t pay them.
That will harm your credit score.
Repairing Your Credit Score. How Long Does It Take?
- Lawsuits and judgments- 7 years, even if the judgment has been satisfied
- Bankruptcy-7-10 years
- Charged off accounts-7 years
- Foreclosure/mortgage default-7 years
- Tax liens-up to 10 years
The Quickest Way to Boost Your Credit Score
Make on-time payments. The longer you maintain a pattern of consistent, on-time payments, the more improvement you’ll see in your credit score. Again, if it’s difficult for you to remember to make on-time payments, set up an alert and follow through.
Another way to boost your credit score is to resolve any errors that may occur on your credit report. Are there incorrect balances? Accounts that aren’t yours? Dispute them!
Having the erroneous information removed from your account will help you quickly improve your credit score.
Paying off debt improves your credit score. Pay off the highest amounts first. Each month, pay as much as you can to get rid of the debt.
And lastly, you can also ask for a credit increase. Depending on the issuer, it’s possible to receive an increase in your credit limit. But remember, an increase in your limit does not mean an increase in spending!
Continue to pay on your current balance until it’s paid for.
A good credit score is your currency in the financial world. Use it wisely. As a first-time homebuyer, learn about the rules regarding mortgage lending, and start with your credit.
Before you enter the real estate market, review your credit history. Every citizen of the US is allowed to access their credit report for free once per year.
If your credit score needs improvement, work on achieving that before you shop for a mortgage lender.
Lilly Title & Settlement is a woman-owned title and settlement company in Staunton, VA. When you’re ready to close on your new home, place your trust in us. We’ll get you to closing quickly and efficiently.