8 Ways to Boost Your Credit Before Applying for a Mortgage

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Buying your perfect home can become a reality with a great mortgage, and that requires a good credit score. There’s hope to dramatically improving your credit, though, if it’s in need of some help. Use these tips to raise your credit score and improve your chances at qualifying for the best rates and terms:

1. Check your credit reports and inspect for mistakes

Credit bureaus can make errors, so make sure to check your credit reports closely for accuracy. Pull your report from the three major credit bureaus (TransUnion, Equifax and Experian) or a free credit report website like credit karma and go through them line by line to look for issues. If you do find a mistake, file a dispute either online or by mail to the bureau. The agency will investigate your inquiry within 30 days.

2. Pay down your credit card debt

High credit card balances are sure to spoil your chances for a good mortgage, as it makes both your credit utilization ratio and your debt-to-income ratio high. At the very least, consistently pay more than the minimum on your cards each month before sending out mortgage applications. You’ll save money, and you’ll show potential lenders that you’re reliable to repay what you borrowed.

3. Keep your credit cards open

An older average account age improves your credit profile. Hold onto all of your credit card and home equity lines, regardless of whether you use them.

4. Request a courtesy adjustment on late payments or dispute them

Just one late payment can reduce your credit score by as much as 110 points, if you previously had very good credit (according to Equifax). If you’re not regularly late, your credit card company may clear this blemish from your credit report if you ask. Write a letter explaining that this mistake was just a hiccup and appeal for a courtesy adjustment. If that does not work, consider hiring a credit repair agency such as Lexington Law. They review your credit reports and then direct appropriate correspondence to your creditors and the credit bureaus with the goal of removing negative information from your report and thereby raising your score. 

5. Consider a 401(k) loan to pay off your credit card debt

Borrowing against your retirement plan and paying off credit cards will lower your credit utilization ratio. As retirement plan loans aren’t reported to credit bureaus, this can raise your credit score. 401(k) loans generally have a much lower interest rate than your high interest credit cards, but do note that the loan typically has to be paid back within 5 years and payments for the loan are deducted from your paycheck. Be sure to also consider the drawbacks of this strategy as it can have tax consequences and penalties, derail your retirement savings, and the loan itself doesn't address the reasons you might have accumulated debt.

6. Ask for a credit limit increase

Increase your credit limit to lower your credit utilization rate, but only if you can keep your spending in check. A large portion (30%) of your credit score is derived from this utilization rate, as lenders don’t want to see credit cards with high balances. So, if you can convince your lender to increase your credit limit from, say $5000 to $10000, this will decrease your utilization ratio — as long as you don’t spend more as a result.

7.  Wait to apply for new credit

As tempting as it is to open a new credit card or take on an auto loan when you’re buying a new house, wait until the mortgage is finalized. Lots of credit inquiries aren’t a good sign for lenders.

8. Don’t apply for too many mortgages

Do your research before you start applying for mortgage loans. Your FICO score begins to register mortgage applications as separate inquiries after about a month. This effect is even greater on other scores, like VantageScore and an older version of FICO, which take each mortgage application as a separate inquiry if they’re separated by more than two weeks according to NerdWallet.

Conclusion

Improving your credit score is a slow-and-steady process, but the reward is great: you’ll be able to buy your home with an excellent mortgage rate and a low monthly payment.

Spend some time analyzing your credit report, focus in on reducing credit card debt and be smart with your credit and you’re well on your way to securing a mortgage and owning your dream home.