Sure, you’ve saved up for a down payment on a new house, but if you have fair credit, you may have a hard time qualifying for a mortgage and buying the home of your dreams. The good news is, you can do a lot to build your credit before you apply. With these tips, you’ll have a much better chance of getting approved and locking in an affordable interest rate.
1. Pay off your credit cards
If you’re up to your ears in credit card debt, lenders will probably think twice before offering you a mortgage because both your credit utilization ratio and your debt-to-income ratio will be high. That’s why it’s a smart idea to start paying off those balances before sending out mortgage applications.
Make more than the minimum payments on your cards each month. Not only will this boost your credit and lower your overall debt load, but it will also save you money on interest and show potential lenders that you’re serious about repaying what you borrowed.
2. Pull your credit reports and check for errors
Mistakes happen. And when they do, you don’t want to be the last person to know about them. Get free credit reports online from the three major credit bureaus, TransUnion, Equifax and Experian, and go through them line by line, checking for inaccuracies. (You can also get your TransUnion credit report weekly on NerdWallet.) If you come across an error, file a dispute as soon as possible. You can do this online, by phone or by mail.
3. Stop applying for new credit
If you’re moving into a new house, you may also be interested in getting a new car for your driveway and furniture to fill your rooms, but hold off on applying for new credit cards and auto loans until you’ve locked down that mortgage. You want your credit report to look as clean as possible when you send in your application, and many new inquiries may raise red flags for lenders.
While delaying the credit card applications could be a good call, it’s generally not a good idea to close all your paid-off cards at the same time. If you do this, your credit utilization ratio may go up and your credit history may appear shorter and less varied, which could also hurt your score. Instead, plan on keeping your accounts open, at least until your mortgage is approved.
4. Shop with purpose
Shop around for a mortgage with the best rates, but don’t let your search drag on. Your FICO score typically allows a shopping window when you are looking for a mortgage. Any applications made within a particular timeframe should be counted as a single hard inquiry for credit-scoring purposes. (Multiple separate inquiries can ding your score). To stay on the safe side, keep your search focused and brief.
If possible, get pre-approved for a mortgage before even shopping for a house, so that if you do find the home of your dreams, you won’t have to worry about getting approved for a loan later.
5. Save aggressively
You’re focused on getting a mortgage now, but remember to protect your credit score after you’ve been approved. Once you make your down payment on your new house, your savings may take a hit and you may feel tempted to start relying on credit more heavily. In the short term, that may be OK, but making it a long-term habit could do some serious damage to your credit score.
If your savings account is dwindling, consider cutting back on expenses where you can and starting an emergency fund. This way, in case of an emergency, you won’t have to use your credit card as a crutch. By protecting your credit score, you’ll also have an easier time applying for mortgages and other credit lines down the road.
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