For some homebuyers, credit repair is the first step toward mortgage approval. A higher credit score can result in several benefits, including lower mortgage payments and an increase in the chance your loan application will be approved by an underwriter.
Knowing what to expect will help ensure that you can reap the rewards of better credit. Here are eight steps to credit repair and mortgage approval.
Do your research. Knowledge is power, especially when it comes to your financial situation. Talk to a financial professional about your credit issues and any qualifying limitations. A seasoned loan officer can be your best ally in your credit repair journey.
Start saving. Beyond having a strong down payment, there are also other out-of-pocket costs to consider like: Homeowner’s insurance, closing costs and taxes. Start saving now.
Know your FICO score. This three-digit number is what creditors use to determine your interest rates and how likely you are to repay your loan. A higher FICO score means faster loan approval with better interest rates.
Check your credit. You’ll also need a copy of your full credit report from all three credit bureaus – Equifax, TransUnion, and Experian. While you review, take note of: How much you owe in total, areas of improvement and any inaccuracies.
Dispute inaccuracies. Creditors can make mistakes. If something on your report is wrong, contact the credit bureau and explain the discrepancy. They’ll research it and make the needed adjustments to your report. This may take a while so the sooner you initiate a dispute, the better.
Lower your DTI. Your ‘debt-to-income’ ratio is the difference between your overall debt compared to your income. The lower your DTI, the better your chances of getting a good mortgage rate.
No new debt. Avoid opening new lines of credit during the loan process as it will increase your DTI. Postpone large purchases (like new furniture) until your move is complete or pay in cash.
Pay on time, every time. If you’ve gotten in the bad habit of paying bills late, cut it out. Late payments result in extra fees and they negatively affect your FICO score.
Don’t be discouraged if your financial situation is disappointing. The beauty of credit is that it can be repaired – sometimes in a matter of just a few months. With a good budget and better habits, you could soon qualify for your new home.