ReSET Blog
Blog · June 29, 2022 · AUTHOR: Darwin Pelea

Repairing Your Credit Score Before Applying For A Mortgage for the First Time

For many first-time home buyers, repairing their credit score before applying for a mortgage can seem daunting. Your credit score is one of the most critical factors in getting approved for a mortgage. Lenders use your credit score to determine how likely you are to default on your loan. The higher your credit score, the lower the interest rate you'll be offered on your mortgage. So, if you're hoping to get a reasonable interest rate on your mortgage, it's worth taking the time to repair your credit score before applying.

However, taking some time to understand your credit score and what steps you can take to improve it can make the mortgage process much smoother. This blog post will give you tips on how to repair your credit score before applying for a mortgage.

Why is a strong credit score necessary for a first-time home buyer?

A credit score is a number that lenders use to determine the borrower's riskiness. A good credit score indicates that you will be able to repay your loans in the future, but it can also suggest that you are a safe bet for future loans.

A good credit score is essential because it shows you can manage your debt and pay back what you owe. If you have a high debt-to-income ratio (DTI), your income does not cover all of the living costs, such as housing and food expenses. It puts you at risk of defaulting on your loan payments if something unexpected happens, such as a job loss or illness.

A low credit score can also increase your chances of getting approved for a mortgage loan. Lenders may require that borrowers have excellent credit scores before qualifying for a mortgage loan.

What factors influence your credit score?

Payment History: The length you've been paying on time, in total, and on time.

Credit Utilization: How much of your available credit do you use as a percentage of the total amount of credit available.

Credit Mix: A component that looks at how much of your available credit is used for different accounts, such as mortgages or other kinds of loans or credit cards.

New Credit: The amount of new credit that's been opened in the past two years; this is a good measure of how long ago your last delinquency occurred (and thus how long it's been since you last paid your bills on time).

Types of Loans: Loans with terms longer than 30 days generally don't count towards your credit utilization percentage because they are not considered "current" in the way that shorter-term loans are (even though they'll still show up on your report).

Steps to take to improve your credit score:

It is possible to improve your credit score before applying for a mortgage, but it will take time and effort. The following steps will help you improve your credit score:

Build Your Credit File

A good credit score is the foundation of your lending process. It's what determines how much you can borrow and at what rate. Here are some ways to build your credit file:

Payment history – Paying on time is one of the best ways to build positive credit scores because it shows lenders that you're responsible with money and has a stable financial life (no late payments).

Monitor credit reports – Checking your credit report regularly will help you spot any inaccuracies or errors in the information on your report, which could affect how lenders view you or give them a reason not to loan money to you if they see an issue with your application.

Don't Miss Payments:

Missing payments on any account can hurt your credit score, so make sure you pay all of your bills on time, even if it means forgoing a few small luxuries like a cell phone plan or cable TV subscription.

Catch Up On Past-Due Accounts:

Pay all past-due balances from accounts, including credit cards and loans, utility bills, student loans, and medical bills, as soon as possible. It will help improve your credit score in the short term and avoid late fees or penalties that could affect your score for a long time.

Pay Down Revolving Account Balances:

If you're paying down your credit card balances, that will help improve your credit score. The more you pay down, the lower your credit utilization ratio will be, which is one of the three factors determining your FICO score (the other two are payment history and amount owed).

Limit How Often You Apply for New Accounts:

Credit scores also consider how often you apply for new credit and how long those accounts remain open. If you use many new credit cards or loans and close them quickly, this will hurt your score because lenders will see it as an indication that you may be unable to handle your finances responsibly in the future.

Tips for first-time home buyers with repairing their credit score:

  • See your credit report: Get a free copy of your credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—to ensure there are no errors. If you find any, contact the bureau to have them removed.

  • Ensure the information is correct: If any late payments or other items are listed incorrectly, dispute them with the credit bureau.

  • Reduce your debt: Another factor that impacts your credit score is the amount of debt you have compared to your available credit (your debt-to-credit ratio). Begin paying down your debts, starting with the highest interest rate first, to help improve your credit score.

  • Keep your balances low: Once you've paid off some of your debt, keep your balances low by using a credit card only for emergencies and paying it off in full each month.

  • Pay your bills on time: One of the most significant factors in determining your credit score is your payment history. Pay your bills on time, including credit cards, utilities, and rent.

  • Create a budget: To make on-time payments and start rebuilding your credit score, you need to know how much money you have coming in and going out each month. By creating a budget, you can better track your spending and make room in your budget to make timely payments.

  • Limit new credit applications: Every time you apply for new credit, it shows up as an inquiry on your credit report and can slightly lower your score. So limit yourself to only using for new credit when necessary.

  • Monitor your progress: Check your credit score regularly to see how you're progressing and identify other areas that need improvement.

How can you use more than one credit card most effectively?

It's good to own two different cards because it allows you to keep your balances low on hand. It can also improve your credit history if you have multiple lines of credit. Use one before its max, pay it in total, and then use the other next month. That keeps your interest lower as well. There is nothing wrong with having more than two or even five cards when needed but what matters is whether or not you can pay these debts off monthly for whole repayment-Most People get several pages just for listing CREDIT CARDS!

Final Thought

You can do a few things to help improve your credit score before applying for a mortgage. You can make sure you keep updated on your current credit score rating, dispute any errors you find on your credit report, and try to build up your credit history by making small regular payments on time. By taking these measures, you can help improve your credit score and be in a better position to get approved. Have questions about pre-approval and mortgage documents? Click to find an article on how you can secure a Mortgage Pre-approval and the documents needed.

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