When buying a home, especially if you are a first-time homebuyer, having good (or great) credit is important. Having a poor credit score could prevent you from buying the home of your dreams. This alone might have you wondering if you’re looking at buying a home, how can I optimize my credit score for applying for a loan? Before you even start looking at homes, you should know what your credit score is to avoid any possible unpleasant surprises.
Why Your Credit Score is So Important
Mortgage lenders look at your credit score to determine your creditworthiness. A low score could indicate that you are a risky borrower. Errors or past credit problems could affect your ability to obtain a mortgage or a mortgage with a lower interest rate.
Depending on your mortgage lender, the minimum credit scores they’ll accept will vary. For example, FHA lenders accept some credit scores as low as 580 with a 3.5% down payment. They might even take a lower credit score with a 10% or high down payment. However, for a conventional loan with other lenders, a minimum score of 620-660 is usually required.
So, what is considered an optimal credit score when seeking a mortgage? Even if you meet the minimum credit score requirements, the higher the score, the more favorable you will look to potential lenders. This will mean better mortgage terms for you. Squeaking by with a 670 instead of a 740+ credit score means you’ll pay a higher interest rate and a higher PMI premium if you don’t put down a 20% down payment. For the best mortgage rates and lower PMI premiums, you want to shoot for at least a 740-760 credit score.
Have a Low Credit Score? Get Ready to Optimize!
If you already know you have a low credit score or have been socked with the reality of finding out your score is maybe lower than you thought, hope is not lost. There are steps you can take right away to start optimizing your credit score with factors that could be affecting your credit score. Take a deep breath and dive into your credit report to uncover the following factors that matter:
Credit utilization ratio: You could be making on-time payments for your credit cards every month, but if you’re carrying large balances month-to-month, you are hurting your credit score. The optimal credit utilization ratio is to have your credit card balances at 30% or below. The easiest fix to optimize your credit score is to pay down your credit card balances. This might mean dipping into the savings you have put aside for your down payment. However, even if you must pay PMI for putting down less than 20% down, the lower interest rate on your mortgage could make this very worthwhile.
Removing errors: It could be possible you have errors on your credit report showing debts unpaid or even debts that aren’t your own. Go through your report and contact creditors and the credit bureaus to have any errors corrected.
Late payments: If you have a history of making late payments, this will hurt your credit score. But if you have only made one slip or two in the past, you could speak to your creditor and request they delete that bad mark from your record. If they agree, they would send a letter to the appropriate credit bureau to remove the negative mark on your report.
The trick to optimizing your credit score is to begin months before you start shopping around for a mortgage. It may take a few months for the credit bureaus to update your score, but it’s possible to have your lender request a rapid rescore, which could turn your wait into just days.
If You Are Considering Buying This Year, Let’s Talk About What Options There Are Today.