The difference between a great credit score and an okay credit score can mean a huge difference in the amount of money one will spend over the term of their mortgage (as well as on other credit related debts).  Home buyers with higher credit scores can get better interest rates on their mortgage which adds up to huge savings over the life of the loan.  Especially if a home buyer starts early enough, they can make significant improvements to their credit score.  This article provides some great tips for home buyers (and borrowers in general) on how to boost their credit score.

Begin Your Journey Early

Whether you are a first time home buyer or have bought in the past the earlier one starts the better.  While a credit score can be quickly knocked down with a few financial mistakes, going in the other direction takes time.  To noticeably boost one’s credit score the home buyer needs to start at least six months in advance.  Depending on the credit issues starting much earlier than six months may be required.

Eliminate Your Debt Effectively

Having too much debt in relation to income can result in an outright denial on a mortgage application.  Paying down debt so there is much more income than debt on one’s personal balance sheet can result in a good-sized boost in credit score.  The overall utilization of credit is also looked at.  For instance, if one has access to $10,000 in credit (credit card debt, personal bank loans, installment credit lines and more) but is using over 75% of that credit that will negatively impact the credit score.  Instead, one should try and keep utilization of all open credit at or below 30%.

Reducing one’s overall credit can actually be counterintuitive especially if by reducing the total credit one increases their utilization.  Unless one has access to a very large amount of credit (whether used or unused) closing accounts prior to applying for a mortgage could be more harmful than beneficial.  There are some cases where someone does have access to quite a bit of credit, something that would indicate red flags to any potential lenders, and as a closing those unused credit lines can help.  Many lenders are willing to talk to you about your credit ahead of time to build a relationship, so feel free to ask for tips!

Timely Bill Payments

One late bill payment (30+ days late) can drop one’s credit score from 50-100 points in one go.  Therefore, you need to avoid any late payments at all prior to applying for a mortgage up through closing on the house.  Even if you can only make the minimum payment on time, make those payments on time to avoid any credit score penalties.

Late payments of 60+ and 90+ days take an even larger toll on one’s credit score.  Any late payment will stay on one’s credit report for up to seven years, but as the time passes from the last late payment the negative impact shrinks.  That is why it is best to always make payments on time to not only avoid the negative impact on credit score but to avoid penalty fees and penalty interest rates that make the debt that much more expensive.

If the late payment is within the 30+ day window and is a once in a rare occasion, you can usually call up the lender ask for a late fee waiver once the payment has been made.  Usually in these circumstances the lender will waive the late fee and not report the late payment to the credit reporting agencies.  If there is a pattern of late payments, then the lenders will not extend that courtesy.

Avoid Applying for Credit

It may seem counterintuitive to not apply for credit when one is planning on applying for a mortgage, but this rule applies to all other forms of credit.  Credit applications for new furniture, electronics, appliances, autos and more, all add-up should be avoided as best as possible.  Each hard pull credit inquiry in a short amount of time will noticeably reduce your credit score.  So, unless it is an emergency, applying for new credit should be delayed until after you have closed on the purchase of a home or completed your home refinance.

While applying for a mortgage can reduce your credit score, usually when it is done the lenders understand the application is being done for the purpose of applying for a mortgage loan.  Home buyers may be applying for a mortgage with a couple of companies around the same time to comparison shop mortgage rates and type.  This is also okay since lenders know home buyers will be doing this.  But, applying with multiple mortgage lenders over a longer period of time will raise red flags with lenders and will result in a reduction in one’s credit score so there is a balancing act to be aware of.

Check Your Credit Report for Mistakes

It is estimated that around 20% of consumers have errors in their credit reports.  Getting these errors corrected can result in quick improvements to one’s credit score resulting in savings over the life of a mortgage.  Home buyers should be checking their credit reports on an annual basis to ensure no errors are present.  The best way to do this is to request one credit report for free from one of the three credit companies and check for errors.  If errors are found, usually the other credit companies will have the same error recorded in their systems as well and corrections will need to be made with all the credit reporting companies.

Things to check on one’s credit report include the spelling of your name, current and past addresses, social security number, and all reported open and closed credit accounts.  If there are accounts shown as open that are not yours, those immediately need to be investigated to make sure identity theft is not involved.  Sometimes duplicates of the same account can be shown as separate accounts resulting in it seeming like the home buyer has too much credit available to them.  Also look for erroneously reported late payments, inaccurate balances and more.  Anything that looks out of the ordinary should be checked closely to make sure it is accurate.

Understanding Credit Counseling Options

Let’s face it, financial education in the US is not the greatest.  Unless one actively seeks out classes on personal finance in their early education years, they will not be exposed to it at all.  Knowing about income, debts and credit is important for all.  Especially important is knowing how to handle debt, take on only necessary debt and at good terms.  Too many get into debt traps with high interest rates that they are never able to dig themselves out of debt.

Credit counseling can help if legitimate companies and/or organizations are chosen.  Unfortunately, there are many companies out there who are simply looking to take advantage of people in financial difficulty and don’t really provide much assistance.  Legitimate credit counseling agencies exist and can be found through online searches (read their reviews), word of mouth recommendations, lender recommendations and even religious group recommendations.  Those seeking credit counseling should take their time in researching the company/organization they ultimately want to work with.

Final Thoughts

Improving one’s credit can lead to great savings over the life of a mortgage or for any other types of credit. One should start early enough in order to get the best results. Sitting down with experts and getting input on your borrowing journey can also be of great help!

What Credit Score Do You Need For Zero Percent Down? – Depending on the mortgage zero percent down options are available and your credit score could be factored into it.