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Clean Up Your Credit Before Buying a Home: A 4-Step Action Plan
Why Credit Matters: Your credit score is a major factor for mortgage lenders. A higher score can lead to:
- Lower interest rates
- Better loan terms
- Lower down payment requirements
Step 1: Know Your Credit Standing
- Monitor Your Credit Report: Get your free annual report from each of the three major bureaus (Experian, TransUnion, and Equifax) at AnnualCreditReport.com.
- Check for Errors: Review all accounts for inaccuracies, old debts, or fraudulent activity. Dispute any errors immediately with both the credit bureau and the information provider.
- Identify Weaknesses: Understand what is impacting your score, such as late payments, high balances, or collections.
Step 2: Master Your Payments
- Pay All Bills On Time, Every Time: Payment history is the most important factor in your score (about 35%). Set up automatic payments or reminders so you never miss a due date.
- Address Past Due Accounts: Pay off any accounts that are currently past due. For accounts in collection, you may consider negotiating, know your rights when dealing with collection agencies.
Step 3: Lower Your Debt-to-Credit Ratio
- Reduce Credit Card Balances: Your credit utilization (the amount of credit you use compared to your total available credit) is the second most important factor (about 30%).
- Goal: Aim to keep your total credit utilization below 30%—and ideally below 10%—on each card and overall.
- Example: If your card limit is , keep your balance under (and ideally under ).
- Keep Accounts Open: Do not close old credit cards, even once they’re paid off. Closing an account lowers your total available credit, which can increase your utilization ratio and hurt your score.
Step 4: Practice Credit Diligence
- Avoid New Debt: Do not apply for any new credit cards, car loans, or other lines of credit in the months leading up to and during the home-buying process. New credit applications result in a “hard inquiry” which can temporarily drop your score.
- Limit Big Purchases: Avoid financing or making any major purchases (like a car, furniture, or a vacation) using credit until your home loan is closed.
- Be Patient: Credit repair takes time. It can take several months for positive changes to be reflected in your score. Start cleaning up your credit 6-12 months before you plan to apply for a mortgage.
Ready to start your homeownership journey? Contact a trusted mortgage professional today for personalized advice and to find out what credit score you’ll need for your loan options! E-mail me for additional questions you may have regarding the purchase of a home.
