A good credit score is crucial to getting a low interest rate on your mortgage. Since most mortgages span 15 – 30 years, you want the lowest rate possible because you will be paying on the mortgage for a long time. Before you apply for a mortgage, it is a good idea to do a credit “tune-up” to make the home of your dreams more affordable.
Credit Repair Tips
Obtain credits reports Experian, Equifax and TransUnion. These are the three major credit-reporting agencies and reports may differ between the three. Your mortgage company may pull any one or all three of them while checking your credit so it is important you know what each report contains.
Review all negative items dispute any that have incorrect information. Once you have successfully disputed the any misinformation, you will have to wait at least 30 days before the change is reflected on your credit report(s).
Pay off as many outstanding collection debts as possible. Debts that have gone into collections lower your score dramatically. If you can’t afford to pay off the debts entirely, contact the collection agency and try to make some sort of payment arrangement. Many agencies will settle the debt for a reduced amount or let you make monthly payments. Making consistent monthly payments lessens the debt’s impact on your credit scores.
Bring revolving credit balances like credit cards and personal loans down to below 30% of your credit limit. Mortgage companies factor in your debt-income ratio when determining what your interest rate will be. Keeping your balances at 30% or less will increase your score and give the mortgage more incentive to extend you credit.
Make regular, on time payments on all your credit cards, loans, etc. If you have a history of late payments, you will need at least six months to one year of good monthly payments to re-establish good credit. The late payments will show up on your credit report for up to two years, but as time goes on your new payment history will push them into the background.
If you are unable to pay down your debts, seek help from a legitimate credit counseling service who can negotiate with credit card companies and debt collectors for you. Don’t look for a quick fix solution or agencies that promise to repair your credit using questionable means. Credit counseling does work, but it requires budgeting. Reputable credit counselors cannot erase your debt. They make an agreement with the companies you owe money and you pay them a monthly amount that they disperse among your creditors.
Credit repair is not a simple or fast process, but it is possible. Whether you have to invest six months or a few years to repair your credit, the effort will be well worth it. Restoring your good credit before you apply for a mortgage will save you thousands of dollars paying off your new home.