If a friend asked to borrow money, would you lend to them? If they’d borrowed money in the past and repaid it, you probably would because they had a history of repayment. What if someone else you know and respect vouched for this friend and assured you that they would repay?
Mortgage lenders face the same situation when deciding who to lend to and how much they can borrow.One of the ways they decide whether or not to lend you money is based on whether you have borrowed money in the past and repaid it on time, which they learn from reviewing your credit report and credit score.
So if you want to improve the likelihood of getting a mortgage – and getting one at a lower interest rate – the best action you can take right now is to improve your credit.
Five Tips To Improve Your Credit
Pay off your debts in full and on time. A credit score is made up of several different components but the biggest influencing factor is whether you have paid off your debts in full and on time. Consistency over time will improve your credit better than any other strategy out there. Be consistent! Set a budget, manage your income so you can pay down your debt, and stick with it. The sooner you start and the longer history you have of consistent payment, the better your credit will be when it comes time to get a mortgage.
Get debt and use it. There’s a huge myth that people believe that says you can improve your credit by not having credit cards and loans… But that is false. A credit score is derived from your history of getting into debt (a healthy amount of debt!) and then paying it back on time. For most people, this is easily done with a credit card or two, and perhaps another loan, that are responsibly managed.
Watch your income-to-debt ratio: Mortgages come with regular repayment requirements, and lenders know that you probably have other debts you need to repay as well. Therefore, they pay attention to the amount of income you earn versus the amount of debt you have. To improve your credit, maximize your income and minimize your outstanding debt.
Minimize your available credit: An often-overlooked aspect of credit health is the available credit. If you owe nothing on your credit card and have a $10,000 credit limit, your available credit is $10,000. Lenders want assurance that you aren’t going to borrow from them and then max out your credit card. So reducing your available credit (while still retaining that credit card) can help to improve your credit.
Don’t apply for more credit if you don’t need it: Another factor that lenders pay attention to is how much credit you’re applying for. If you apply for a lot of credit regularly, it can hurt your chances of getting a mortgage. So ignore those credit card offers that come in the mail, especially in the months leading up to your mortgage application.
When you apply for a mortgage, your lender will pull your credit report and credit score to help them determine whether or not to lend to you. If you focus on these tips to improve your credit, you’ll improve your chances of getting a great mortgage at an attractive interest rate.