What’s a credit score?

After applying for a home loan, an underwriter will evaluate your credit reports along with your income and debt to determine if you qualify for a mortgage at this time. The higher your credit score, the less risk you pose, and the more likely your lender will approve your loan at a lower interest rate. On the other hand, a low credit score may affect approval and how much mortgage you can afford. You may expect to pay a higher interest rate and therefore spend more money over the life of your mortgage.

While a perfect score isn’t necessary to get a home loan, a higher score can mean better terms. The good news for most homebuyers is that credit scores aren’t set in stone. When you understand how to increase your credit score, you can take action now and better your chances in the future of being approved for a home loan and qualifying for a lower interest rate.

• 1. Check your credit reports

  Your credit score is calculated based on the information in your credit reports. So, the first step to improving your credit score is to read your credit reports. Credit reports include your:

  • Credit and loan accounts
  • Account balances
  • Payment history
  • Credit inquiries
  • Public records about legal matters such as bankruptcies and tax liens

  All this information on your borrowing and repayment history shows how you manage credit, which is essential when applying for a mortgage.

  Because three credit bureaus collect data about you and your credit history, you have three different credit reports. It’s recommended to check all three. You may notice that some of your information is displayed differently depending on if you’re reviewing your Experian, TransUnion or Equifax report. Regardless of the agency, all credit reports contain the same basic information.

  Every twelve months, you can request a free copy of your credit report from each credit reporting company through annualcreditreport.com.

• 2. Make your payments on time

  Your payment history is an important factor in determining your credit score. If you have a lot of bills to pay, start by making a list of your payments—for example, credit cards, online subscriptions and auto loans. Then, find out when each payment is due and add that to your list. A great way to ensure you pay your bills on time is to set up autopay for everything on your list. If that’s not possible, set aside a day each month to pay your remaining bills. Just make sure that day is before your bills are due.

• 3. Lower the amount you owe

  Your total outstanding balance compared to your total credit limit is also a significant factor influencing your credit score. Having a high balance on revolving credit accounts like your credit cards and lines of credit can lead to a high credit utilization rate and hurt your score.

  According to Experian, individuals with excellent credit scores have a credit utilization rate in the single digits. “So, for example, if your credit limits across all of your credit cards add up to $10,000, keeping your total credit card usage under $1,000 will be best for your scores.”

• 4. Identify inaccurate or incomplete information

  Because mistakes on your credit reports can lower your credit score, reviewing them for accuracy is essential to boosting your credit score. Red flags on your credit reports may include the following:

  • Accounts of another person with the same or similar name
  • Closed accounts reported as open
  • Accounts incorrectly reported as late or delinquent
  • The same debt or account listed more than once
  • The reinsertion of incorrect information after it was corrected
  • Accounts with an incorrect current balance or credit limit

  Errors like these may reduce your credit score unnecessarily and lead to less favorable loan terms. The bottom line—mistakes on your credit reports can cost you money. The good news is that you have the right to dispute incomplete or inaccurate information. Follow these five steps to fix incorrect information on your credit report.

• 5. Choose a co-borrower

  While co-borrowing doesn’t improve your credit score, it can boost your chances of getting approved for a home loan. If you have less-than-perfect credit, you may benefit from a co-signer’s or co-borrower’s good financial history. Typically, the lower middle score from each applicant’s credit score is pulled from all three credit bureaus.

Raising your credit score doesn’t happen overnight. The National Association of REALTORS© maintains that improving your credit score in one to two months is possible. However, it may take longer, depending on why your credit score is low. To raise your credit score to buy a home, they recommend starting with “short-term damage control.”

First, tackle correcting errors, settling delinquent accounts and optimizing your credit utilization. Then, focus on building a better payment history to improve your score in the long term.

Whether it takes months or years to achieve homeownership, our loan officers will use their expertise to determine how you can afford the home you want, help you find the right loan and guide you throughout the homebuying process. Connect with a loan officer at your local branch to learn more.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans are subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.