How to Repair Your Credit Before Buying a Home
In the eyes of a lender, your credit score speaks volumes about you. It indicates how you’ve managed debt and credit established in your name. It shows if you pay your bills on time, every time. More importantly, it paints a picture of how risky you will be as a mortgage holder.
Your overall credit picture doesn’t just land you a loan approval or denial. It can actually help decide your interest rate, which in turn impacts how much you’ll pay over the life of your loan. In other words, it’s something worth paying attention to before searching for a lender and a loan.
If your credit could use some work, start here.
Get Your Credit Report
Unless you’re already diligent about checking your credit, there’s a good chance you don’t even know what a potential lender might see.
Begin by visiting AnnualCreditReport.com for a credit report from each of the three credit reporting agencies: Equifax, Experian, and TransUnion. Each credit agency can have different information, so it’s important to pull all three reports.
- Personal Information: In order to make sure all of the information being reported is in fact tied to your name and social security number, check the personal information (names, numbers, and addresses) at the top of your report.
- Late Payments: Payments made 30, 60, or 90 days late will stay on your report for 7 years and can have a big impact depending on when they occurred and how frequently. Make sure any of the late payments did occur as reported.
- Public Records: The public records section of your report will show accounts sent to collections, liens, judgments, and bankruptcies. These can also have a significant effect on loan approval and terms, so check for inaccuracies.
- Credit Accounts: Look through the accounts on your report and make sure they were opened by you and the status (open, closed, etc.) and credit limits are correct. If credit limits aren’t accurate, your reported credit utilization ratio could be off as well.
- Inquiries: If lenders see recent inquiries indicating you’ve been trying to make large purchases or take out new lines of credit, your chances of getting a loan could diminish. So make sure any inquiries made were actually done on your behalf and not an indication of fraud.
Repair Your Credit and Correct Mistakes
If you do see mistakes anywhere on your credit report, now is the time to fix them — before they lead to lengthy delays in the loan process. There are two steps you may need to take:
- Contact the credit bureau who is reporting inaccurate information
- Contact the creditor who originally reported the inaccurate information
When you contact the bureaus, you will need to state the inaccuracies and provide copies of documentation supporting your claim.
Fortunately, each of the 3 major credit bureaus now has a webpage where you can start this process:
For in-depth information on how to dispute errors and fix your report, see the FTC’s website.
Check Your Credit Score
The credit report you receive from the three credit reporting agencies won’t give you your credit score, but there are now a few ways to view your score for free. Check first with your current credit card or loan provider. If they don’t provide a free score, these websites can:
Be aware, however, that not all sites offer the same scoring model — just like your lender may use something else entirely. But this will at least give you a snapshot of where your score is.
Improve Your Score
Once you’ve checked your score, then it’s time to bolster it. Here’s a short list of things that can help your credit score:
Pay Down Debt
One thing potential lenders will look for is how much credit you’ve used, compared to how much is available to you. This simple formula (the credit used divided by the available credit) determines your credit utilization ratio. While there isn’t a strong rule about what your credit utilization should be, many use 30% as a guideline for what you should stay under.
If your current ratio is on the high end, now is the time to start paying down your debt — as vigorously as your current financial situation will allow. However, once credit card balances are paid in full, make sure to keep cards open. If a card is closed, you will have less available credit, negatively impacting your utilization ratio.
Pay Your Bills On Time (Every Time)
The last thing you want to do right before seeking loan approval is to pay your bills late. Show potential lenders you can handle a mortgage on top of your current financial obligations by paying all of your bills on time, every time.
Avoid Big Purchases (and Medium Purchases, Too)
In order to avoid hard credit inquiries on your credit report and keep your credit utilization down, avoid making big purchases before seeking loan approval (and during the entire loan approval process).
Look into Rapid Rescoring
Whether you’ve managed to fix mistakes on your credit report or worked to pay down a large chunk of debt, your score might take some time to move upwards. That’s why some lenders offer a service called rapid rescoring.
During this process, information about the changes are sent to the credit reporting agency and reflected on a consumer’s credit report and score within days — instead of weeks or months. This can help speed up the approval process and potentially land you better loan terms.
Not all lenders offer this service. Check with yours to see if this is an option.
The Bottom Line: Start the Process Now
Whatever work needs to be done to repair your credit, now is the time to start. Credit repair can be a lengthy process, one that won’t speed up just because you found your dream home. By starting the process now, you can get a firm grasp on the next steps and potentially save yourself stress — and money — down the road.