Although we don’t specialize in credit score reporting issues, there are circumstances that we may be able to assist our borrowers with during the loan pre-approval process. In many cases, when we look at credit reports in order to pre-approve a borrower, we are not only looking at credit scores, but also at the components of credit, how the borrower utilizes credit currently and how they have used it in the past. There are often things we can recommend that they can increase their scores or better prepare them to begin the mortgage process that can be accomplished in a short time.
Most borrowers will have credit scores from three bureaus – Experian, Trans Union and Equifax. The lender will utilize a report which shows all three credit scores of the borrowers. The score they will use is the middle score. If there are two borrowers they will determine the middle score of each borrower and use the lower of the two scores.
#1 Use Credit
One of the most common mistakes we see is borrowers who do not utilize credit. In some cases, this is because they have gotten into trouble in the past with credit issues and possibly experienced a bankruptcy. Many people who have had such issues decide that the best way to avoid future problems is to avoid using credit. While that will ensure that you don’t run into problems, it may make it difficult to obtain credit when you decide you would like to buy a home.
The best way to demonstrate that you use credit responsibly is to have a variety of different types of credit, pay your bills in a timely manner, and keep balances relatively low in relation to your credit limits.
#2 Use Different Types of Credit
One of the things that can help to improve a credit score is to have a variety of types of credit. In other words, installment loans such as auto loans and mortgages; and revolving credit such as bank/nonbank/retail store/gas credit cards. Most credit experts recommend that you have a diverse mix of these credit sources.
#3 Pay Your Bills in a Timely Manner
One of the things that can hurt your credit more than anything is late payments, particularly when they are recent. I have seen too many instances in which a borrower neglected to make a payment on an account between the time they were pre-approved and the time they found their dream home. Unfortunately in the majority of these cases, the score dropped so significantly that the borrower was unable to pursue their home purchase. While it is not necessary to completely pay off credit card balances each month, minimum monthly payments must be made to preserve your credit scores. Many people also neglect to pay medical bills that they believe are the responsibility of their health insurer. Medical bills that go into collections will damage your credit.
#4 Keep Balances Relatively Low in Relation to Credit Limits
This relates to your revolving credit accounts which have a credit limit. The best way to manage your credit is to be aware of your credit limits and make sure that the balances on your revolving accounts are low in relation to the allowed limit. This is referred to as “credit utilization” and is calculated by adding up the balances on all of the revolving credit accounts and dividing it by the credit limit on all revolving accounts. The lower the utilization percentage is, the better your score will be. That is why it is often recommended that you do not close out revolving accounts that are not used, as that will reduce the total credit available and thus increase the credit utilization percentage.
#5 Check Your Credit at Least Annually
If you keep the above general guidelines in mind while preparing yourself to purchase a home, you should be ready when the time comes to buy. It is a good idea to check your credit at least annually to make sure that there are not errors or items you were not aware of. You are entitled by law to receive a free credit report once each year. The official site to obtain your credit report is AnnualCreditReport.com. Beware of other sites which may offer free credit reports as many of them offer free reports in an attempt to sell other products and services.