How to Get Your Credit Ready for a Mortgage

Your credit score is one of the key factors when trying to secure a home loan. This number will ultimately indicate whether you're approved for a mortgage and impact the terms and interest rates. In essence, the better your credit score, the more money you'll save over time.

Ideally, you'll start working on your credit score up to two years before you apply for a mortgage, as it takes time to improve this number. However, there's no better time to fix your credit than right now.

Here are the key steps of preparing your credit for a mortgage

Look at Your Credit Report

The first step when preparing your credit for a mortgage is to look at your detailed credit report. This report will dive into the factors influencing your credit score and give you a roadmap for the path ahead. Your credit report will show you everything you've applied for and borrowed, payments you missed or made late, and any trips to collections.

Once you know what factors are impacting your credit score, you can take the necessary steps to fix them. Keep in mind that certain items will stay on your credit report for a long time.

Dispute Negative Items

Negative items are the financial mishaps that impact your credit score— for example, a bill going to collections. If a negative item is outside the statute of limitations or has incorrect information attached, you can dispute it to have the item removed. 

To dispute a negative item, you must write a letter requesting data validation from the creditor. There are many letter templates for removing collections and inquiries to guide the process. The creditor is obligated to respond within 30 days with the data validation. If they fail, you can submit a request to have it removed from your report.

Keep in mind that this process is for incorrect or outdated information; if you missed paying your phone bill last month, you can't have that item removed.

Pay Down Existing Debts

Another factor that impacts your credit score is your existing debt. As long as you make your minimum payments on time, your credit score won't get any worse, as this shows financial responsibility to creditors. However, the ratio of how much you're approved for to how much you borrow also impacts your credit score.

In essence, if you're approved for a $10,000 line of credit and only use $2,000, your credit score will be better than if you borrowed $5,000. Make a plan to pay down existing debts, but don't close the accounts!

Minimize Hard Inquiries

Hard inquiries are a negative item that shows up on your credit score when you seek approval for a loan. While they aren't weighted as heavily as missed payments or collections, they do impact your credit score for up to two years.

When you shop around for a mortgage, do ample research before allowing brokers or banks to pull your full credit report. When you pull your credit report for review, it will not impact your score as it's considered a soft inquiry. 

Create a Financial Plan

While working on your credit score is an important aspect in securing a home loan, it's a temporary fix. Use this opportunity to develop a long-term financial plan that ensures you can keep the home you purchase and still enjoy your lifestyle. 

Consider working with a financial advisor to help develop a budget and strategy so that you can create a healthy relationship with money.

Understand Your Mortgage Options

While you work on your credit report, you should also take the time to understand your mortgage options. There are various types of home loans available, depending on your lifestyle and income threshold. These options have different credit score requirements.

While conventional home loans have higher credit score requirements, there are options for low-income households and veterans with lower credit score requirements. Conventional mortgages have a minimum credit score requirement of 620, which is a healthy target to aim for.

Use this simple guide to help you prepare your credit for a mortgage. Remember to implement smart money management skills and healthy financial habits to be a happy, responsible homeowner.

How to Get Your Credit Ready for a Mortgage


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