Before Applying for a Home Loan: Does Improving Your Credit Score Help?

Your credit score plays an important role in determining how difficult it will be to get financing for a home loan and the interest rate of your mortgage. Improving your credit score before applying for a home loan can be beneficial, but it will depend on how soon want to purchase a home.

Ideally, you should work on making improvements to your credit score while you are saving up the down payment to purchase your new home. Most people spend a year or two setting aside money to buy a home. This allows plenty of time to review your credit and see where you can make improvements.

How do I get a copy of my credit reports?

Everyone is entitled to free copies of their credit reports annually from all three major credit bureaus. You can either visit each credit bureaus’ website individually to request the reports or use the federal government’s free annual credit report website to request all three simultaneously.

What information should I look at on the reports?

You will want to review each of the credit accounts listed on your reports and verify whether the information is accurate. Keep in mind, the balances reported on the credit reports can run a month behind the current balances.

If you find any inaccurate information or accounts that are not yours, you need to submit an inquiry request to have the information reviewed and/or removed from your report. This process can take several months to complete. Once they are corrected and/or removed, it will be a few more months before you see a change in your credit score.

How do I find out my credit score?

Your free annual credit report does not include your credit score. Each credit bureau has its own methods for calculating credit scores, so they can be different. Many banks and credits cards are now offering free monthly credit scores, so you can utilize these free services to find out your credit score from specific credit bureaus.

You will want to verify which credit bureau the score is being calculated from—i.e. TransUnion, Experian, or Equifax. Then, if you need to, you can pay to get the score(s) from the other bureaus not made available through your bank’s free credit score service.

TIP: Most lenders use an average of all three credit scores when reviewing your home loan application.

What factors are considered in credit scores?

There are both major and minor factors used to calculate credit scores. Major factors include:

• Oldest Credit Accounts – The longer you have had a credit account, whether it is open or closed, the age of these accounts is an indication to lenders of how well you manage your credit. So, if you have old auto loans you have paid off or other good credit accounts that are paid off, never request to have these removed from your credit history.
• Credit Utilization – This factor looks at how much of your available credit you use. Ideally, you only want to utilize no more than 30% on each of your credit accounts, but this is not always feasible or possible.
• On-Time Payments – Making payments on time and paying at least the minimum amounts due help show lenders you are a good credit risk because this often indicates you will also make any future payments on time, too.

Minor factors include:

• Number of New Accounts – The number of new accounts you open, especially in a short period of time, can lower your credit score. When you are getting ready to buy a home, you should avoid opening new credit accounts, including auto loans and personal loans.
• Available Credit – This factor is the amount of available credit you have on your credit cards. The higher the amount, the better it is for your credit score.
• Number of Recent Inquiries – Every time you apply for credit, it results in an inquiry on your credit report. An excessive number of inquiries in a two-year period could indicate a potential risk by lenders, so the lower number of inquiries, the better.

TIP: The three major credit bureaus recently changed how they count inquiries for certain loan products like home mortgages. They understand you may shop around and apply for several home loans from various lenders through mortgage brokers. As such, they only count this as one inquiry because you will only get one loan.

Improving your credit score can help increase the number of loan programs available to you, as well as lower interest rates on mortgages. To find out what loan programs and rates you could qualify for, get prequalified for a home loan through A and N Mortgage. Call us at (773) 305-LOAN (773-305-5626) today!