Top Homebuyers’ Credit Improvement Tips

Homebuyers’ credit improvement tips can really serve as effective ways to help obtain a mortgage. When it’s time to buy a home, most people need to apply for a home loan. Of course, this means having to qualify. And, that’s not necessarily a straightforward process. This is due to the fact credit reports are notoriously inaccurate. In fact, a government study reveals some 40 million consumers have at least one error on their credit files, and, 20 million contain significant errors, causing credit denials.

Common Mortgage Mistakes HOME BUYERS Make

Now, it isn’t always about what’s in a person’s credit file that’s wrong. Some home buyers sabotage themselves in different ways. Mortgage lenders run a credit check when a person first applies. But, lenders routinely run a second credit check, known as a “soft credit check” just days before closing. Why? Well, lenders are risk-adverse.

“There are a lot of rumors circulating when it comes to credit scores and how to improve them: Do you really need to pay a credit repair company to increase your score? (No.) Will getting married help raise it? (No.) Will making on-time payments every month give it a boost? (Yes.) If you want to make your score better, perhaps because you plan to take out a sizable loan in the future, consider [the right] strategies.” —U.S. News and World Report

Which means if a previously approved mortgage applicant makes a large purchase, like opening a new line of credit for furniture. Or, finances a car. These shift the buyer’s DTI or debt-to-income ratio. So, don’t make any big purchases ahead of closing. It’s also strongly advised not to switch jobs or take large cash withdrawals from your bank account. Any of these might well be enough to cause a last-minute home loan denial.

Top Homebuyers’ Credit Improvement Tips

If you’re ready to apply for a home mortgage, you should first pull your credit reports from all three bureaus: TransUnion, Experian, and Equifax. (You can do this, for free, once per year at Annual Credit Report.com.)

First, it’s important to understand how your score is computed. Five elements are factored to determine your score: payment history (35 percent), credit utilization (30 percent), credit history length (15 percent), new credit (10 percent), and credit mix (10 percent). Once you have your credit files, do the following:

  • Find and dispute all errors. Although there’s a lot of information in your credit history, you’ll need to go through it carefully. Find any errors and then dispute them via snail mail. Do not use the online dispute forms because these usually don’t provide sufficient space. Then, follow-up in 30 to 45 days.
  • Lower outstanding balances. One of the best ways to boost your credit score is to pay down your balances. If you have recently opened accounts, it’s okay to pay these off and close them so you don’t have too much available credit.
  • Negotiate old account balances. Don’t just ignore old balances. Instead, negotiate a settlement and get a written agreement from the creditor to update your credit file as paid. For old accounts, contact creditors and negotiate. Offer a lump sum of 40 to 60 percent and only make payment with a money order or cashier’s check.
  • Don’t open new accounts for a better credit mix. Although credit mix is a part of how your score is calculated, it’s not advisable to open new lines of credit. Just make payments on-time and keep your balances below 25 to 30 percent. Or, pay off accounts to improve your credit score.

If you are considering buying a home in Orlando, contact us for the latest market information. We’ll also provide you with the right advice about the local real estate market so you make the best decisions.