When the housing market boost up and more people decide to buy new homes, it’s important that your credit score provides a helping hand to secure a mortgage for you. Conventional lenders will typically ask for a FICO score of at least 720, or in some critical cases 740, but people with a score of 700 or below may still have the chance to qualify for an FHA loan. So, let’s look at the steps you may take to ready your credit before buying a dream home:
1. Review your credit report
Several months before getting the home or a mortgage, check your credit report and identify issues. If you normally an on-time bill paying, then check your credit two to three months prior to applying for a mortgage. It’s just to be on the safe side and avoid any mistakes. For those who know they’ve late payments or other derogatory items on their account, it’s better to start clearing up things six to nine months in advance.
2. Dispute any inaccuracies
You must file a dispute with the credit reporting agency if your credit report contains any errors — such as, an unpaid item that you have already paid or a credit account balance, which shouldn’t be there.
3. Make sure you have several tradelines
Conventional loans will require minimum three tradelines (combination of student loans, credit cards, auto loans, etc.) These tradelines must be active within the past 12 to 24 months. FHA loan asks for two tradelines. If you have fewer tradelines, you won’t be able to get a mortgage. If you need to open additional tradelines, a new Visa or Mastercard credit card will be the best option. You need to open that account at least 6 months before you apply for a mortgage.
4. Leave older credit lines open
Old tradelines will boost your credit score, so you must let old credit accounts open even you don't use them. You should use those old credit cards sometimes in every few months and pay them off in full so that those accounts or tradelines remain active.
5. Avoid opening new credit lines
When you’re six months away from applying for a home loan, don't create new credit lines. If you do, it’ll lower your credit score. The credit bureau considers any new credit account as a risk factor. Lowering your credit score is not worth that 10% discount you’d get from a department store for opening a new credit card.
6. Stop buying on credit
Being excited, some people rush out to buy new appliances or furniture before closing. But even if you’re in escrow, having a debt utilization ratio above 30% right before closing could disqualify your loan. Be patient for purchasing your new furniture until your loan is closed.
7. Don’t shuffle money around
When you apply for a mortgage, you’ll need to provide several months of bank statements for your checking and savings accounts. If you suddenly shut an account or have a large transfer from one account to another, then you’re going to have to paper-trail that whole account too. Leave your money and your accounts for at least three months.