As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
There’s a common trope where in school, if you did something against the rules, you were told that it would go on your permanent record and would prevent you from succeeding in college and beyond.
While we can’t speak to whether or not a third-grade food fight will keep you from studying biochemistry at Harvard, we can tell you that every move you make with your credit history is tracked. It all goes down on your credit report.
If you’ve got negative information on your credit profile, it’s going to stay on your report for seven years (10 years for a Chapter 7 bankruptcy). This may be particularly troublesome if you’re looking to get a new car or a house. The good news is the older the negative items are, the less they’ll affect your score.
Developing good habits can boost your credit score, which in turn can show lenders you’ll be a good credit risk going forward.
FICO and Your Mortgage
Having good credit means better interest rates because you’ve shown lenders and investors that you’re a responsible borrower. The main way the average person gets a glimpse into the state of their credit is through their FICO score.
To get a mortgage, the minimum score for FHA loans is 580, while conventional loans require a 620. There is no specific minimum for VA loans, but individual lenders may have their own criteria. Rocket Mortgage® requires a minimum credit score of 580 for VA loans. In general, the higher your score, the more options you’re going to have when it comes to your mortgage.
A number of factors play into your credit score. These include the credit mix, your payment history (including existing debts) and how much credit you utilize.
Check Your Credit Report
Much like maintaining your car with inspections and tune-ups, you should try to check your credit report on a regular basis. This is particularly important if you’ve found your score is lower than you’d like.
It’s important to know the details of your score because not only does it help you identify any credit problems you have, but it also makes you aware of any inaccuracies that may be present on your report. In a 2012 study by the Federal Trade Commission, it was found that one in five consumers had an error on their report that had to be corrected by a credit reporting agency.
You can get your credit report for free through Rocket HomesSM.
If you do find something on your credit report that doesn’t look right, you can file a dispute with the individual credit bureaus.
Deal with Debts and Collections
The best thing you can do to boost your score is to pay off debts and collections. Creditors would rather have some money than no money, so if you can either work out with the creditor an amount you can afford or get on a repayment plan, it can really help.
If you can’t find a way to make the payment in full, you can try to strike a deal with the creditor to make at least part of the payment. If you do this, it will show up as “paid as agreed” on your credit report. This isn’t as good as “paid in full,” but it does help. If you must cut this type of deal, make sure it’s worth it for you. Don’t pay as agreed if you’re able to make the full payment in the near future. It will hurt your credit.
Paying off debt will also help with your debt-to-income ratio (DTI), which will help when you’re getting a mortgage. Keeping your DTI as low as possible enhances your chances for mortgage approval because it shows your lender you don’t have too many debt payments that could take precedence over paying your mortgage every month.
It’s important to pay off collections in order to get a mortgage. However, in paying it off, it may restart the clock so that the collection appears more recent than it actually is, hurting your score. We recommend that when clients pay off their collection, they ask the creditor to delete or remove the collection from the report. This way, the collection is paid off and it helps your score.
When you apply for a mortgage, it’s a good guideline to keep your credit utilization at no more than 30%. For example, let’s say you had a credit limit of $1,000 on a particular card. You would want to put no more than $300 at any given time on that particular card.
If you can’t make that work, higher utilization may be all right as long as you pay off the full balance (or a substantial portion) every month.
Asking the banks to increase your credit limit can help your utilization percentage. That way, you can spend the same amount you normally would, but you’ll be utilizing less of the credit you have available to you. Creditors won’t necessarily do this if you have a checkered credit history, so it might be best to show you can regularly pay the balance and pay off any debts and collections first.
Broaden Your Credit Horizons
It’s beneficial to have a few different types of loans and lines of credit on your credit report. Typical ones include a car loan, a personal loan for home repairs or something similar, and a couple of credit cards.
If credit bureaus see you have a mix of loans you’re paying toward every month, you show a history of being a responsible borrower. When you apply for a mortgage, the lender will check to see that you consistently make your payments.
You don’t necessarily want to take out loans you don’t need and build debt just for credit’s sake, but having the loan variety is something to keep in mind as you build your score.
New to Credit?
If you’re new to credit, you’re going to need to build it up a little bit before applying for a mortgage. Fortunately, there are a couple ways to do this without it taking years.
To start off your credit history, you’ll probably have to start with a secured credit card. With a secured card, your credit limit is secured by a deposit of your own money. If you put $1,000 down as a deposit, your credit line would then be $1,000. As you pay off your balance every month, you’ll start to build a credit history.
After several months of paying off your balance on time, you might be able to get other unsecured cards and other types of loans.
Another way to quickly build credit is to become an authorized user on someone else’s credit card account. This can be a good option for spouses and family members. If the payments are already being made (and you might be contributing to them), this can give your credit a boost.
Think you’ve worked on your credit enough to get into the house you’ve always dreamed of? Talk to one of our licensed Home Loan Experts today by filling out this form or calling (888) 728-4702.
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