Prepping Your Credit Report for Homeownership

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Preparing to buy your first home can be daunting. One of the most daunting aspects is your credit score and how it affects your ability to get a home loan. When broken down, it’s fairly simple. Here are some ways to prepare your credit report for homeownership:

Pull Your Credit Report

First, pull your credit report and check for any inaccuracies. Having inaccurate information can hurt your score and therefore hurt your chances of approval for a loan. If you find inaccurate information you will want to dispute it and get it corrected.

Resolve Any Delinquent Accounts

Next, you will want to resolve any delinquent accounts (collections, charge offs, etc.) You may be able to set up a payment plan with the creditor. You may also be able to settle for a portion of the balance owed. It’s possible you could owe more in taxes if you settle. Thus, it’s important to discuss your situation with a tax adviser before you decide to. Whatever you choose, having the accounts resolved with no balance will help your credit score and improve your chances of being approved for a home loan.

Wait 6 Months If Any Late Payments

If you’ve had any late payments reported to your credit report, be sure to wait at a minimum of 6 months before applying for a home loan. Any sooner than that and you will likely be denied, which will hurt your score and make it more difficult to apply again. Having no late payments in the last 24 months will significantly increase your chances of approval and having none on your credit report at all (over the last ten years) will further increase your chance of success.

Have 2-3 Tradelines

Have at least 2-3 tradelines open and current on your report. Any fewer and you will not qualify for a mortgage. It doesn’t hurt to have a variety of installment and revolving accounts to help your score while you’re at it.

Reduce Your Debt-to-Income Ratio

Reduce your debt-to-income ratio to 30% or below to build stronger credit. This will also affect your back-end ratio, which needs to be below 36% for a conventional loan and 43% for an FHA loan.

Don't Open New Accounts

Don’t open any new accounts for at least six months prior to applying for a mortgage. Not only will the new account bring your score down, it will also look risky to the bank and hurt your chances for loan approval.

Keep paying your debts down and on time each month to build your credit score. The 750 range will give you the best rates. You need a minimum credit score of 580 to be approved for an FHA loan, in most cases.  A minimum credit score of 620 is needed for a conventional loan.

For more tips on how to prepare your credit report for homeownership, check out our popular blogs:

Mixed Credit Marriage: Say “I Do” to a Home Mortgage

Avoid These When Disputing Credit Report Mistakes

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