Your credit score is one of the most important factors that lenders consider when it comes time to apply for a home loan. For those who have mediocre or poor credit, there are steps you can take to improve your credit score before applying for a home loan.
In general, having an excellent credit score leads to better loan terms and a higher borrowing limit. So what can you do to improve your credit score?
Understanding the Credit Basics to Improve Your Credit Score
To start improving your credit score, you've got to understand the fundamentals first. There are basic rules of credit you can start following to see an improvement of your score before applying for a home loan.
1. Stay below 20% of your available credit
For example, if you have a credit line of $1000, aim to keep the balance at or below $200. Keeping your balances below 20% shows that you are a responsible spender. This 20% rule applies across all of your credit line accounts. If you have multiple accounts, totaling an available credit of $10,000, your total balance should stay below $2,000.
2. Keep 3 or more revolving lines of credit
Maintaining three or more accounts properly means you are using each account responsibly - actively using each account, keeping your balances in check, paying your bill on time.
3. Have accounts with different credit types (Visa, Mastercard, AMEX)
Holding accounts with a diverse range of creditors shows that you have been considered eligible for borrowing by multiple sources.
4. Do not close old accounts
Length of credit history is extremely important in building credit, and having multiple accounts opened and closed can reflect poorly on your credit score. Try to maintain the same accounts for as long as possible.
5. Start with a secured card if you can’t get approved for a conventional credit card
For those with no credit or with poor credit history, getting a credit card can be difficult. We recommend applying for a secure credit card - a line of credit from the bank that holds collateral until you have a proven track record of responsibly maintaining the account. In many cases, banks will require $200 for collateral and offer a $500 credit limit. Once your credit has improved, the bank refunds you the $200.
Start Improving Your Credit Score to Prepare for your Home Loan Application
It is never too late to begin improving your credit score, especially if you are thinking about applying for a home loan. As your credit score is a top factor in getting approved for a home loan, it is extremely important to be intentional about your lines of credit. It is also important to avoid other common mistakes when applying for a mortgage, such as making large purchases or applying for multiple lines of credit.
If you are unsure of where your credit score stands, we suggest finding a trusted online tool to find out. Many online resources offer helpful insights into why your credit score may be low and give other helpful tips for improvement.
Of course, having a great credit score is not the only factor. Income is another large factor which is why we offer an online tool to calculate different mortgage details to gain an understanding of what you can realistically afford.
Are you wondering about your borrowing capabilities with your current credit score? Contact our office and one of our loan experts can review your options with you.
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