Mistakes or negative information on your credit report can cost you big when you are trying to qualify for a mortgage. Bad marks can mean a much higher interest rate or not getting approved at all -- even if the information is not yours. Fortunately, you can improve your credit score by putting in time and effort before you apply for your loan. For the best improvement, aim to begin repairing your credit at least six months before you plan to get a mortgage.
The first step to fixing your credit is requesting free copies of your credit report from Equifax, TransUnion, and Experian which you can do once a year at no cost through AnnualCreditReport.com. Make sure you get copies from all three credit bureaus because each will have different information. Your lender may use just one credit report, but most use the information from all three reports.
Before applying for a loan with a mortgage lender, go over your credit reports carefully to search for mistakes or information that a lender will see as a red flag. Keep in mind most people have some type of error on their credit file which may be a typo, incorrect name, outdated account information, incorrect account history, accounts that are not yours, or collections or liens that do not belong to you.
Any mistakes you find can be disputed with the credit bureau. Provide any documentation and be prepared to wait up to a month for a response and an update on your report. Correct negative information, on the other hand, can stay on your credit report for up to seven years, except bankruptcy which can remain for 10 years. The older the negative information, the less it will hurt your credit score. You may have luck contacting your creditors and asking them to remove negative information.
If you have charge-offs or collection accounts, your lender may or may not require that you pay them off before qualifying for a loan. A new FICO scoring method, not yet used by most lenders, also improves your credit score when you pay off collections. Remember that your lender wants to see that you honor your obligations and unpaid collections are viewed more negatively than paid collections.
Another way to boost your credit history and chances of getting approved for a loan is reducing your level of debt. The underwriter has a maximum debt-to-income ratio that can be approved. Try to get your monthly debt payments to no more than 10% of your income.
In the months leading up to your mortgage application, make sure you pay all of your bills on time to avoid recent late payments on your report. You should also avoid opening new credit accounts, or closing old accounts, both of which can harm your credit score and make your lender think you are having financial problems.
Some mortgage brokers and lenders offer something called Rapid Rescoring, a technique that helps you quickly improve your credit score in a matter of days. Rapid rescoring involves getting information added or updated on your report in days, not weeks. It can help boost your score by a few points to 50 points or more, depending on what information is updated or corrected, helping you get approved or get into a better credit tier for a lower rate.