Use These Steps to Improve Your Credit Score Before Applying for a Home Loan

Smart home buyers follow these tips to decide how much house they can afford to buy before starting a home search.

Is your credit score healthy enough to help you buy a home with a low-interest rate? Now that you are in the market to buy a home in North Carolina, it is time to take a look at your credit score and, if needed, take the necessary steps to improve your credit. Credit score repair does not happen overnight. So, if you are thinking of applying for a mortgage in the near future, start using the following tips to improve your credit score today.

Credit Scores and Mortgages

Lenders use a buyer’s credit score to determine risk. The best credit ratings indicate to a lender that a buyer is more likely to pay back a loan and make monthly payments on time. What’s the reward for mortgage borrowers who have higher credit scores? Those home buyers receive lower interest rates, make lower monthly payments on their loans and end up paying less for their home over the life of the loan.

So, what does your credit score need to be to secure a mortgage to purchase a home? That number is not set in stone because as notes, “lenders all have their own definitions of what is a good credit score.” That same website indicates that most credit scores fall within a range of 301 – 850 with 700 – 749 reflecting good credit and 750 and above reflecting excellent credit.

So, what steps can you take to improve your credit score if falls below 700? You can start by using the following tips to improve your credit.

Check Credit Report and Dispute Errors

The first step towards credit score repair involves requesting a free credit report from one of the three major credit bureaus (Equifax, Experian and TransUnion). Requesting a credit report will not harm your credit score. Once you have a free copy of your credit report in hand, review it carefully for errors. If you find errors on any of your reports, dispute them with the credit bureau.

Pay Attention to Payment History

One of the best, and most obvious, steps you can take to improve your credit before applying for a home loan in North Carolina is to pay your bills on time. Whether you pay bills on time, late, or skip payments altogether, these transactions show up on your payment history which makes up 35% of your credit score. Create automated bill payment reminders, work with creditors on payment plans if necessary, and do not let an account go into collection because not only does this lower your credit score, it also stays on your record for 7 years.

Reduce Debt with Payment Plan

Start paying down your credit card debt and other loan debt with the help of a payment plan. The amounts owed on these types of accounts determine 30% of your credit score. A buyer who is using a high percentage of available credit raises red flags that you are at a greater risk of missing payments or defaulting on payments. Start by paying down the accounts and credit cards with the highest interest rates first.

Good Old Debt is Good for Credit Score

When you want to improve your credit score, don’t be so quick to close old accounts or request old accounts be removed from your credit report. Here’s why: your length of credit history represents 15% of your FICO score, and the creditors and debt that you’ve handled well and paid is good for your credit. Eventually, these accounts will come off your report, but leave them be for now as they actually help improve your credit score.

Smart Tip for Paying Revolving Credit Balances

The smaller the percentage of revolving credit (think credit card) you use in relation to how much revolving credit you have, the better it is for your credit score. Don’t think, however, the best way to keep this low is to pay off your credit card balance each month when payment is due. Because the total balance on your last statement is generally the amount that will show in your credit report, you can improve your FICO score by paying twice a month – once just before the statement closing date and a second payment just before the due date.

Open a Credit Card Account

Did you know that opening a credit card account can help boost your FICO score? However, opening a number of credit cards in a short period of time can also harm your credit score. The key here is to be smart when it comes to new credit. And remember, if you are a buyer who already has gone through mortgage pre-approval, do not start opening new credit cards, taking out new car loans, or buying new appliances on store credit, etc., as these actions could disqualify you for a loan in the eyes of the lender.

Have other questions about buying a home in North Carolina? You can find more helpful information about the home buying process in our Buyer’s Guide. Ready to buy a house in Raleigh, Durham, and Chapel Hill? Contact Red Door Company today, and we’ll help you find your dream home.