Getting Credit Ready for a New Home Loan

Buying a home is often a good decision, not only because it has tax benefits and locks-in your monthly housing obligation, but also because you can buy new construction, being able to customize your property to fit your wants and needs. What’s more, there are a number of financing options, which translates into ample opportunity to get a good deal, saving you thousands of dollars over the length of the loan.

What’s confuses so many mortgage applicants, is about their credit history and FICO score, a model which has changed, making it easier to secure a home loan. Why it can be confusing is how creditworthiness is calculated, although public, is still dominated by myths and misnomers.

What Determines Your Credit Score

Credit scores, determined by the Fair Isaac Corporation, change from reporting bureau to reporting bureau. The reason for this is, in-part, is due to which creditors send information to the reporting agencies. Though most creditors do report to all three, the proprietary modeling within each agency is enough to vary a consumer’s score from one to another.

“A recent study by the Federal Trade Commission found one in five consumers had at least one error on a credit report. Some of those errors were big enough to damage the consumer’s credit score. The good news: The credit bureaus have to investigate and remove or correct any errors you find.” —

A FICO score is determined by five factors: payment history, which accounts for 35 percent, amounts owed, making-up 30 percent, length of credit history, which is 15 percent, and new credit and types of credit, each of which makeup 10 percent. Of course, the most important is payment history, and amounts owed comes-in a close second. Take notice that the percentages drop to half or less than half for the remaining three.

Getting Credit Ready for a New Home Loan

When you apply for a home loan, mortgage underwriters will obviously pull your credit files. To get your credit ready for a new home loan, the single most effective thing you can do is to concentrate on your debt. Paying down debt will have the most impact to boost your score. Here are some other ways to improve your credit score before applying for a mortgage:

  • Dispute any and all errors. In a 60 Minutes report, it was revealed that 40 million credit reports contain errors. Of those, about half contain errors significant enough to cause creditors to turn down applications. Dispute any and all errors, and don’t use the online forms. Instead, use old-fashioned snail mail and be sure to include documentation.
  • Request creditor forgiveness. Referred to as a “goodwill deletion,” this is a request you make to creditors to remove negative entries on your credit file. Creditors are more likely to do this if you have a good payment history and approach them without pretense.
  • Don’t open new lines of credit. One of the most hurtful things consumers do to their credit file is to increase it. By opening new lines of credit, you are changing your debt-to-income ratio, which experts caution to keep below 35 percent of your income.
  • Keep long standing accounts open. When you close old credit lines, you are shortening your credit history. Those older accounts do have value and as the model demonstrates, are important enough to be a part of scoring calculation.

In addition to improving your credit, you should also be saving for a down payment and have money set aside for an earnest money deposit, inspections, your move, and other miscellaneous expenses.