Mortgage lenders typically look for credit scores that are at least 620 or above. But a higher credit score generally qualifies you for lower interest rates and better loan terms, which can save you money over the life of the loan.
Before you apply for a mortgage loan, it’s in your best interest to prepare your credit file to make sure your scores are as high as possible to help you get approved. According to Bankrate, current mortgage rates sit at 6.9% this week (as July 25, 2024).
Credit scores indicate to lenders how well you manage money and if you are likely to default on financial obligations.
Tips to get your credit file ready for a mortgage loan
1. Have 12 Months of On-Time Payments. Your credit history should show at least 12 months of consecutive on-time payments. Any late payments 24 months or older will not heavily count against your credit score but be prepared to explain them to a lender.
If there are late payments within the last 12 months try approaching your creditor to request a goodwill adjustment. Oftentimes creditors will delete late payments if you are typically a good customer or if you can politely explain to them you are trying to get the best rate on a mortgage loan.
2. Get FICO Scores not Vantage Scores. Before you approach any lender order your FICO Scores to see what you’re working with. Most mortgage lenders use FICO Mortgage Scores, which can be very different than the credit scores you get through credit monitoring services.
Sites like Credit Karma or Credit Sesame are good tools to keep you up to date on your credit history and activity but their credit scores may be very different from your actual FICO scores. Find out why the difference in FICO Scores and Credit Karma’s Vantage Scores matters.
The VantageScore scoring model was created by the major credit bureaus but the fact that 90% of top lenders use FICO® Scores to make credit decisions is worth noting.
For now, many mortgage lenders continue to request older versions of FICO® Scores but that may change in the near future with the use of newer FICO and VantageScore® scoring models being used.
Avoid any surprises or misinformation in your credit history by ordering the scores used by most mortgage lenders at myFICO.com.
3. Do Not Close Paid Off Accounts. Consumers will often pay off accounts to get rid of excess debt before applying for a mortgage. This is great but don’t close paid off accounts because it may affect your average age of accounts. Having older credit accounts shows a longer credit history that can positively affect your score.
4. Public Records. Civil judgments and tax liens should not be on your credit reports as of July 2017 but you may have offer some explanation about the mishaps. Any unpaid judgment or tax lien will be required to be paid. A foreclosure or bankruptcy will not prevent you from getting a mortgage but they should be at least 2-3 years old.
5. Collection Accounts. The best approach to any collection account is to have it deleted from your credit report. If the collection account is 48 months or older it should have little impact on credit scores but a lender may still require it paid.
If you have some extra cash it is best to approach the collection agency and request a pay for delete. They may not always agree and if that is the case request a “paid” notation instead.
6. Charge-Off Accounts. If you’re able to pay the full amount, the original creditor or collection agency may be more open to negotiating a “pay for delete” agreement. This involves them agreeing to remove the charge-off from your credit report in exchange for you paying the debt. However, there’s no guarantee they will agree to this
As with any collection account, the best approach is to request the account be removed in full as a condition for payoff. It can stop further negative reporting:
Once the account is paid in full, the creditor can no longer report it as delinquent, which can help your score over time.
It may make the creditor more willing to negotiate: If you’re able to pay the full amount, the original creditor or collection agency may be more open to negotiating a “pay for delete” agreement. This involves them agreeing to remove the charge-off from your credit report in exchange for you paying the debt. However, there’s no guarantee they will agree to this.
The problem with charge-offs is that some creditors don’t report the charge-off on a monthly basis – So you may have a charge-off that last reported in 2018. But once you pay it off, the creditor updates the date of last activity which makes the charge-off look more recent.
This can actually hurt your credit scores. Eventually, your credit scores will recover but it will take several months as the charge-off ages. Negotiating an actual removal of the tradeline avoids this scenario.
7. Student Loans. If you have multiple student loans speak to your lender about consolidating them into one loan to reduce total student loan payments.
If your loans are not consolidated, the lender will use the information from your credit reports which will result in higher student loan payments. This can affect your debt-to-income ratio. Consider lowering your student loan rates through student loan refinancing.
Avoid student loan delinquencies, especially in the most recent 12 months of applying for a mortgage loan. Any student loan that is currently deferred should have documentation so the lender will not calculate a payment obligation.
If a payment letter cannot be obtained, the lender will use 2% of the principal balance to determine the appropriate payment obligation for qualifying for a mortgage. Only FHA loans omit student loan debt from the lender’s qualifying ratios if it is deferred for 12 months or longer.
8. Credit Cards. Having multiple credit cards is not a problem with lenders – But having multiple credit cards with balances is. No matter the number of credit accounts you have, there should be no more than 2 that carry a balance.
By no means should you apply for a mortgage loan while carrying a balance on all of your credit card accounts. Not only will your score be lower, lenders will view you as a high-risk borrower.
High utilization is a no-no if you want high credit scores. Improve credit scores by using less of your available credit. Even if you have only 2 credit cards with balances, those balances should be 10 percent or less of your available credit limit.
That means if the credit account limit is $5000, the account balance should be $500 or less.
9. New Credit. Whatever you do, never apply for new credit while working with a mortgage lender. Want to see a mortgage lender blow their top – apply for credit during the mortgage loan process.
Want to shoot yourself in the foot – apply for new credit while trying to get a mortgage loan.
It may be tempting to purchase new furniture or appliances for your new home but wait until the ink dries on closing escrow documents. Any change in your credit score during the mortgage application process can result in a denial.
10. Multiple Mortgage Loan Applications. Worried about hurting your credit scores if you shop for a mortgage? You’ll be relieved to know that mortgage-related credit inquiries in the prior 30 days are ignored when calculating FICO scores. After thirty days of multiple mortgage-related inquiries, those inquiries will be counted as one single hard inquiry in your credit files.
11. Show Stability. Show evidence of steady employment for a period of one to two years. Have a bank account, preferably checking and savings, in good standing. If you currently conduct financial transactions with a prepaid card – Stop.
Find second chance banks or bank accounts for bad credit to re-establish a banking relationship. Have a utility bill in your name at your current residence. All of the above show stability and lenders like borrowers who can demonstrate a stable financial foundation.
12. Hold off on that new car. The cost of financing a car includes not only monthly loan payment but also fuel, maintenance and insurance. When applying for a mortgage loan an underwriter is going to take into consideration how much of your household income is allocated towards an auto loan.
It should not exceed 15 to 20 percent. The lure of a new car can get in the way of home ownership if you do not have sufficient income.
13. Consider FHA for Low Credit Scores. For consumers with low credit scores or damaged credit, FHA loans may fit the bill. An FHA loan insures the lender against default, making lenders more willing to work with low credit scores.
FHA loans do require a 3.5 percent down payment and borrowers will have to pay a 2.25 percent mortgage insurance premium up front along with a monthly premium for as long as the loan is kept.
FHA will give buyers with damaged credit a chance to own a home. FHA requirements for 2023.
