6 Ways To Improve Your Credit Score For A Mortgage

how to improve your credit score for a mortgage

Financially, it is always smart to keep an eye on your credit and continuously work to improve it. Most large purchases that require borrowing also involve an institution looking into your credit. When considering your credit score for a mortgage, you want it to be the best it can be.

A good credit score can give you a head start on more favorable interest rates, and even better loan terms. If you have been struggling to optimize your credit for a mortgage, this spring, a.k.a. Adirondack mud season, might be the best time to see what you can do to improve your credit rating. Starting now will allow you to be in a better place by summer to start looking for houses and shopping for a mortgage.

How Your Credit Score for a Mortgage Is Determined

Your credit score or FICO score is calculated based on five factors including: payment history, amount owed, length of credit history, new credit and credit mix. These factors are the most common measurements used by lenders to determine how much of a risk you are as a borrower.

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This factor takes into account whether you have consistently made payments on your debts. It will also look into missed payments, bankruptcy and collections. The more issues with payments the lower your credit score will be.

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Creditors will look into how much you owe relative to the credit you have available. Borrowers that consistently use a majority of their allowed credit are seen as a higher risk. Keeping this at 30% or below will help your credit score.

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The longer you have been making payments, as well as the length of the loans, will give creditors an idea of how strong of a borrower you are. Making consistent payments and never missing one for 10 to 20 years is safer than a new borrower who may miss payments.

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Taking out new credit can affect your score. Applying for new credit frequently tells creditors that you could be financially pressured. The occasional new credit line demonstrates that you are consistently paying off debt.

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Lenders will also look into what mix of credit products you currently have. This involves short term credit, like credit and store cards, as well as long term credit including mortgages and auto loans. Having a balanced mix will increase your credit score.

The factors above are reviewed and calculated every month to supply an accurate report for lenders and borrowers. Frequent monthly reviews gives borrowers all the information they need to continue implementing strategies to improve their credit. Understanding the above factors will help you build and maintain a strong credit score for a mortgage to influence your home and other purchases in the future.

6 Ways to Improve Your Credit Score for a Mortgage

Once you’ve had a chance to evaluate your credit score for a mortgage and understand how the above factors are affecting it, it is time to fix anything that is holding you back. Taking action now to repair your score will give you a better chance receiving the best terms on any future loans you decide to pursue.

Fixing your credit score for a mortgage could be a quick and easy process, or one that will take some time. Look into which factors are at play in your particular case, and make a game plan to address them. Strategies to consider include fixing any errors, paying on time, getting utilization below 30%, paying down debts, keeping old credit cards open, and finally not opening any new credit.

Fix Error

Unfortunately, credit bureaus can make mistakes. Similar names, identity theft, closed accounts and repeat accounts can be found in some reports. You will be able to discover quickly whether errors are holding you back and resolve the mistake to fix your credit.

Pay On Time

If you have slacked off about paying on time, now is the time to really buckle down. This is one of the easiest ways to start to rebuild your credit score for a mortgage. Paying on time on a regular basis is one of the largest factors on your credit score.

Utilization Below 30%

When things come up, it’s easy to throw debt onto your credit cards. If you are using more than 30% of your available credit, consider what debts you could pay off and how you can avoid additional debt to bring your credit usage below 30%.

Pay Down Debts

Similar to getting your credit card balances below 30%, considering the big picture of all your debts and how to begin reducing is helpful. Start with the smallest balance debts and get them paid off, then start working down the large ones.

Keep Old Cards

While cutting up your old credit card and closing the account might seem tempting, consider credit score implications first. The longer you have had a card, the more confident lenders are in your ability to hold debt and consistently make payments.

No New Credit

When you are working on fixing your credit score, adding new debt is not the best way forward. During the correction period, focus on removing as much debt as quickly as you can. Adding new debt should only happen in emergency situations so your credit utilization remains low.

How This Affects Your Credit for a Mortgage

The higher your credit score, the more favorable rates and terms you will be able to access for your mortgage. Generally, most lenders require a minimum of a 620 credit score in order to qualify for a loan to purchase a home, except for a few government backed loans.

Business Insider recently released a report showing the difference in interest rates based on January 2024 credit scores for a $300,000 mortgage. In this report, a 30-year fixed mortgage borrower with a 620-639 (lowest) credit score would receive an interest rate at 7.8% while a borrower with a 760-850 (highest) credit would receive a 6.2% interest rate. While this interest rate is only 1.5% more, it does add up over time.

Using the rates above if you plan on purchasing a $300,000 home, consider interest paid after a 20% down payment on a $240,000 mortgage for 30 year fixed loan:

  • At a 6.2% interest rate, you would pay approximately $111,000 in interest over the life of the loan.
  • At a 7.8% interest rate, you would pay approximately $174,000 in interest over the life of the loan.

As you can see, this a $60,000 savings that every borrower should look into receiving. These differences in interest paid over life of loan due to percent interest rate applies to all large purchase loans, not just mortgages. Continuing to monitor and work on your credit score will pay significant dividends in the long run. The extra savings you get from better loan terms could be put toward other projects, improvements or any life events you would like to enjoy.

If your goal is to find and purchase your dream home this summer, our experienced ADKPP forever agents advise getting started this spring with a thorough review of your credit score. Taking the time to review your credit situation and start corrective action now will allow you to access the best loan terms available to you when summer buying season rolls around. Check out our current listings online or contact an agent today for assistance with your Adirondack real estate needs.

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