4 Steps to Prepare Your Credit Score Before Getting a Mortgage
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A FICO Score may be the most important number in our financial lives that many aren't aware of. In fact, 59.1% of Americans don't know their credit scores, according to LendingTree research.
That's shocking. Successfully building for a comfortable retirement requires many to slash out-of-pockets costs over their lifetimes as borrowers, done easily by increasing their credit scores to land a low mortgage rate and reduce the cost of their largest monthly expense.
With that in mind, Motley Fool analysts, Kristine Hartjes and Nathan Hamilton, discuss in the video below four ways potential homeowners can prepare their credit scores before searching for a new home,getting pre-approved for a mortgage, or when refinancing. Listen in to uncover a handful of simple credit score tips.
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KRISTINE HARJES:
The single, most important number in your financial life is your credit score. It goes into so many things [and] most importantly, your mortgage. How much you end up paying when you go to buy a home. So how can you best prepare your credit score prior to getting a mortgage?
NATHAN HAMILTON:
There are a few steps you can take and I like how you mentioned it's the single, most important, I say, three-digit number in your financial life. It has a huge impact on your ability to get low rates and essentially improve your financial future.
So the best thing you can do -- a couple of steps to get prepared -- is get prepared early. If you know you're going to be buying a home in a year, start looking at your credit score at least 12 months in advance of that, because there may be credit errors on your report and some different factors that FICO scores account for. They roll off after 12 months. So it is something [where you should] at least give yourself 12 months of time to prepare your credit score. Do at least attack that certain factor.
KRISTINE HARJES:
So once you start looking at your credit score, if you spot some areas that you would like to improve upon, how do you go about making those changes?
NATHAN HAMILTON:
There are a number of ways to do so, and I would say the most important thing, first off, is to figure out how you actually find those errors. There are a number of free services out there. One is FreeCreditReport.com. Another is Credit Karma. They've got a great app where you can see any sort of inquiries. You can see if there are any credit issues on your report.
Generally what you can do with [a site like] Credit Karma is actually apply through Credit Karma for them to work on your behalf to fix any issues. There are other ways to do it, but that is one option to consider.
KRISTINE HARJES:
So say all of your information is correct after you've checked into it, and you're still not satisfied with your score. What can you do to raise it?
NATHAN HAMILTON:
So there are two single factors that impact your credit score the most. Paying on time affects 35% of your FICO score [and] 30% of your FICO score separately is affected by what's called your credit utilization ratio. I know that sounds a little odd, but I'll explain it [in a] fairly straightforward [way].
If you have $100,000 worth of available credit, you want to keep that credit utilization to a low level. Credit score models generally like to see below 30%, so that would suggest borrowing less than $30,000 in that scenario. But to really get the best FICO score, you've got to be below 10%. Some people even say 0% -- paying off your credit cards on a continuing basis -- but at least 10% should be your goal.
But give it time. It's not immediate. You don't get your credit utilization down and one week later your credit score improves, so that's why it's important, as well. Start focusing on it at least a year before getting a mortgage.
KRISTINE HARJES:
Great advice. And it's also important to remember that since it is a ratio, you have a numerator and a denominator to work with. You can try to lower the amount that you are borrowing, or you can try to raise your credit limit.
NATHAN HAMILTON:
Yes, and it's easy to raise your credit card limit.
KRISTINE HARJES:
It's shockingly easy.
NATHAN HAMILTON:
Yes, I just did it actually two weeks ago with one of my credit cards. I thought I had to call up and it was available online. I just entered a few details and they increased my credit limit. Now I don't borrow any money on that credit card, but it does affect your utilization immediately.
KRISTINE HARJES:
Yup, I had the same exact experience a couple of weeks ago. It was maybe five clicks online.
NATHAN HAMILTON:
A no-brainer. Do it.
KRISTINE HARJES:
So one last thing about preparing your credit score before getting a mortgage. We've talked a lot, today, about shopping around, and that is important; but what is the key thing you need to remember?
NATHAN HAMILTON:
Shopping in a finite period. And what I mean by that is shopping a few lenders. Going through the approval process to see what your rate is. To see how much mortgage you can qualify for with a number of lenders, and then making them battle for your business from there.
In regards to your FICO score, every time there's an inquiry, your FICO score is negatively impacted, but newer FICO score models account for this when you are rate shopping; so if they see a number of mortgage inquiries within about a two-week period, it's going to be looked at as one single inquiry. So it's just a matter of understanding when [you are prepared] to start going through the approval process and then figuring out that two-week window where you can start officially going through with it.
KRISTINE HARJES:
Sounds good. For more information about credit scores and mortgages, go to Fool.com/Mortgages where you can compare rates and also get in contact with certified lenders. Or you can download our free mortgage guide, "5 Tips To Increase Your Credit Score Over 800."
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