Your credit score is one of the most important factors in determining your mortgage interest rate and the loan options available to you. A stronger score can lower the cost of your loan, although how much depends on the loan type and the market. Here's how to prepare your credit before applying.
Why Your Credit Score Matters
Lenders use your credit score to assess the risk of lending to you. A higher score generally means better pricing and loan terms. Here's how scores generally translate to mortgage options. These are rules of thumb, not guarantees, and lenders and loan types differ:
Lenders use specific credit scoring models, and the models accepted for mortgages are changing. Newer models such as VantageScore 4.0 are being added alongside the classic FICO scores, but which score your lender uses depends on the loan type. Ask your loan officer which score they will pull.
The Rate Impact
Even a small difference in interest rate adds up over a 30-year loan. Higher scores generally qualify for better pricing, but the size of the difference changes with the market, the loan type and your down payment. Ask your loan officer to show you how different scenarios compare.
Steps to Improve Your Credit Score
1Check Your Credit Reports for Errors
Get free copies of your credit reports from AnnualCreditReport.com and review them for errors. Common mistakes include:
- • Accounts that aren't yours
- • Incorrect payment history
- • Outdated information (old addresses, closed accounts)
- • Duplicate accounts
Dispute any errors with the credit bureaus (Equifax, Experian, TransUnion) and with the company that reported the information.
2Pay Down Credit Card Balances
Your credit utilization ratio (how much of your available credit you're using) is a major factor in your score. Lower utilization is generally better. Many people use 30% as a rule of thumb, and lower is better still; these are common guidelines, not official cutoffs.
Example: On a $10,000 credit limit, a $3,000 balance is 30% utilization and a $1,000 balance is 10%.
3Make All Payments On Time
Payment history is the #1 factor in your credit score. Set up autopay for at least the minimum payment on all accounts. Even one 30-day late payment can significantly impact your score.
4Don't Close Old Credit Cards
Closing a card reduces your total available credit, which can raise your credit utilization. Accounts in good standing that you close generally stay on your report for years and continue to count toward your history, but it's usually best not to close accounts in the months before you apply for a mortgage.
5Avoid New Credit Applications
Each credit application results in a hard inquiry that can temporarily lower your score. In the months before applying for a mortgage, avoid opening new credit cards, car loans, or other credit accounts. Several mortgage inquiries made within a short shopping window are usually counted together, so comparing lenders is generally fine.
What NOT to Do Before Applying
Avoid These Credit Mistakes
- ✗Don't open new credit cards or loans
- ✗Don't make large purchases on credit
- ✗Don't close existing credit accounts
- ✗Don't co-sign for anyone else
- ✗Don't pay off collections without guidance
- ✗Don't max out credit cards
How Long Does Improvement Take?
The timeline for credit improvement depends on your starting point:
- Paying down credit cards: often reflected once your lenders report the new balances, typically within a billing cycle or two
- Disputing errors: typically 30 days, and up to 45 in some cases
- Building positive history: takes months of on-time payments
- Recovering from major issues: can take a year or more, and negative items can stay on your report for up to seven years
💡 Quick Win: Rapid Rescore
In some cases, your lender can request a "rapid rescore" that updates your credit report, and your score, faster than the usual reporting cycle. This works best when you've paid down balances or corrected errors. Only a lender can request it, and a fee may apply. Ask your loan officer if this option might help your situation.
Questions About Your Credit?
Our team can review your situation and help you understand your mortgage options.
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