Let’s be honest, not often do we have our credit report on our mind but when the time comes to apply for a mortgage, every point in your credit score matters. While you can get approved with a FICO score around 620, you often need a 740 or higher to get the best rates. If you want to maximize your credit score and potentially save tens of thousands of dollars in interest over the life of your mortgage, follow the following plan.
TODAY – REVIEW YOUR CREDIT REPORT
Go to annualcreditreport.com and review your credit report from each of the three major credit bureaus. You can get a free credit report from each bureau every 12 months. While some people like to spread them out over the year instead of requesting them all at once, it’s important to know that each bureau may have different information.
When you get your credit report, first check it for accuracy. If there are any errors, such as accounts listed that don’t belong to you or accounts incorrectly listed as delinquent, the creditor and credit bureau are required by law to fix them upon notification.
You should also make a list of any negative items that are properly reported. Sending goodwill letters or offering to pay off charged-off accounts may convince creditors to remove that negative information. While a creditor doesn’t have to remove accurate negative information, if any do agree, each one that does will likely bump up your credit score a few points.
3 YEARS – BUILD A CREDIT HISTORY
Most mortgage lenders want to see that you have at least two to three active tradelines to show that you can use credit responsibly and make payments on time. A tradeline can include a major credit card, secured credit card, student loan, or auto loan.
While some people prefer to use cash and believe using cash is more responsible, lenders want to see a history of you making small payments before relying on you to make a larger mortgage payment. However, you never need to pay interest or fees to demonstrate good credit usage — you are always free to pay your bills in full each month.
2 YEARS – STOP APPLYING FOR NEW CREDIT
When you’re within two years of purchasing a home, it’s time to put your credit on hold. Don’t apply for any new credit no matter how good the sign up bonus is. Your credit score drops slightly each time you apply for credit, and new accounts also drag down your credit score by reducing your average age of accounts.
Even a small hit to your credit score can cost you big. A 0.25% interest rate increase can add about $5,000 in interest per $100,000 borrowed over a 30-year mortgage.
18 MONTHS – REQUEST CREDIT LINE INCREASES
One thing that you can apply for at this point is credit line increases on your existing cards. If approved, the increased credit limit will help your credit card utilization and boost your credit score. The reason to do it this far out is that if your bank requires a hard credit inquiry for a limit increase, the inquiry only hurts your credit score for 12 months.
1 YEAR – START DAILY MONITORING
Start watching your credit like a hawk when you’re within the final 12 months. Any surprise changes, even errors, could delay your closing and potentially cost you your dream home. You need to know about any changes as soon as they happen so that you have plenty of time to fix them.
At this point, your free annual credit report isn’t enough. The cost of signing up for daily or weekly credit alerts from each of the three credit bureaus is far less than paying additional mortgage interest or delaying your closing because you were surprised by something on your credit report.
9 MONTHS – PAY DOWN DEBT
If you have additional cash beyond your savings for your down payment, moving expenses and emergency fund, think about repaying any outstanding debt early. While your total monthly payments don’t directly impact your credit score, mortgage lenders do consider your debt-to-income ratio when deciding how much you’re approved for and your interest rate.
If you have credit card debt, even at a zero-percent intro rate, consider paying that off first because your credit card balances can directly lower your credit score in addition to increasing your debt-to-income ratio.
3 MONTHS – MICROMANAGE CREDIT CARD UTILIZATION
While most of your credit score is built over time, up to 30 percent of your credit score is a snapshot of how much of your credit card limits you were using as of your last credit card statement.
- For a good credit score, use no more than 30 percent of your total credit limits across all cards.
- For a better credit score, make sure none of your cards are above 30 percent of their individual limits.
- For an even better credit score, temporarily only use one card.
- For the best credit score, use between one and ten percent of a single card’s credit limit. (Zero is bad because lenders want to see you paying at least one credit card bill on time each month, and a zero balance doesn’t generate a bill.)
While this may force you to change your spending behavior and miss out on a few rewards points, the benefit of squeezing every last point out of your credit score is much greater.
FOUND YOUR DREAM HOME – MORTGAGE APPLICATION TIME!
Once you’re approved, you can relax and stop worrying about micromanaging your credit, but keep the good money habits you developed to save on future car loans, get better credit cards and improve your personal finances as a whole.