Ready to Make the Move on Your First Home? Here's How to Improve Your Credit Score to Land that Mortgage!

So you’ve set your sights on purchasing your first home. You've got it all planned out: four-bedrooms in the perfect neighborhood with a manicured lawn and home office. Sounds great!

But if you'll be applying for a mortgage, as most people do, it’s worth improving your credit score. Also called a FICO score, a credit score is a simplified calculation of your history of paying back debts and making consistent payments on loans. When you borrow money to buy a home, lenders want to know you'll pay them back and a credit score is an easy way to assess that likelihood.

Why should you care? The better your credit history and the higher your score, the better your opportunities and rates are for a home loan. The Federal Housing Administration requires a minimum credit score of 580 to permit a 3.5% down payment, and major lenders often require at least 620, if not more. So what can you do if your credit report is in less than okay? Don't panic, there are simple ways to improve it. Here’s how to get that all-important number up!

Pull your credit report, with caution.

The three major U.S. credit bureaus (Experian, Equifax, and TransUnion) each release their own credit scores and reports (a more detailed history that's used to determine your score). Their scores should be roughly equivalent, though they do pull from different sources.

To access these scores and reports, one tool you can use is AnnualCreditReport.com where you can get a free copy of your report every 12 months. You can alternate which credit reporting company you pull from every few months that way you can have steady knowledge of where your credit score stands.

Better yet, check with your credit card company or bank. Some offer free access to scores and reports allowing you to monitor your score and keep track of expenses and budgets-all in one place. Once you've got your report, thoroughly review it, particularly the adverse accounts section that details late payments and other mistakes.

Erase one-time mistakes.

So you've made a late payment or two—who hasn't? Call the company that registered the late payment and ask that it be removed from your record. If you had an oopsy and missed just a payment or two, some companies will indeed tell their reporting division to remove this from your credit report. Granted, this won't work if you have a history of late payments, but for accidents and small errors, it's an easy way to improve your credit score.

Dispute any errors.

A 2013 Federal Trade Commission study found that 5% of credit reports contain errors that can erroneously ding your score. So, if you spot any, start by sending a dispute letter to the bureau, providing as much documentation as possible, per FTC guidelines. You'll also need to contact the organization that provided the bad intel, such as a bank or medical provider, and ask them to update the info with the bureau. This may take a while, and you may need documentation to make your case. But once the bad info is removed, you should see a bump in your score.

Increase those limits!

If you can, one great way to increase your credit score is to simply pay off your debt. If that’s not an option, there’s a way to boost your debt to income ratio. Ask your credit card companies to increase your credit limit instead. This improves your debt-to-credit ratio, which compares how much you owe to how much you can borrow.

Having say $2,000 of credit card debt is bad if you have a limit of $2,500. It isn't nearly as bad if your limit is $6,000. Although you owe the same amount, you're using a much smaller percentage of your available credit, which bodes well on your borrowing practices.

Pay on time.

It’s always important to pay on time but it’ll be more important now than ever. If you have a habit of paying late, now's the time to break the habit. Commit to always paying your bills on time; consider signing up for automatic payments or calendar reminders so it'll be sure to get done and you won’t have to worry about it!

Practice patience.

Unfortunately, negative items such as habitually late or missed payments can stay on your report for up to seven years. The good news? Changing your habits makes a big difference! That's why it's essential to start early so you are set up for success once you're shopping for homes.

Once you've set your credit on a better path, it's time to tackle the next major hurdle: saving for a down payment! Stay tuned for our next blog on saving for a down payment.

Interested in learning more? Reach out to our team of real estate advisors!