Plan ahead. Prepare
Mortgage lenders use rate sheets to determine what interest rate a borrower will receive when applying for a loan. These rate sheets layout various available rates that are tiered based on a variety of factors.
The primary factors that determine a borrowers interest rate are; credit score, loan to value ratio, debt to income ratio, loan type, loan purpose, & term.
We are going teach you how to address the credit score in this article.
With a little bit of upfront planning, you may put yourself in a better position for lower rates. Making a few changes to your debt profile can make a difference.
Monitor your credit
If you are not already monitoring your credit, it is a good habit to get into. Here are a few benefits that come with credit monitoring:
• Identity Protection
• Score Tracking & Loan Balance Updates
• Monitor Payment History
• Overall Better Understanding of Your Finances
• Know Your Debt Ratios
Monitoring your credit score will help you to prepare for future financing and improve your chances of getting a better interest rate.
Continue reading to learn tips on what you can do to prepare your credit for a mortgage.
myFICO is leading the way when it comes to credit monitoring. There are a variety of other credit monitoring services, but with myFICO you get access to all three credit bureaus. This is important because your middle (average) FICO score will be used by mortgage lenders. If you only have access two one or two, you may think that your credit is better or worse than it is.
Make sure you know what all three scores are; you will have a closer idea as to what your true average score is.
myFICO developed by FICO. Sound familiar? Well, the FICO score is the scoring system that is used by the majority of lenders across the United States. Seems reasonable that if you want legitimate FICO scores and credit updates, the best source would be from FICO themselves.
Signing up is simple, there is a monthly subscription charge, look at this as an investment in your personal finances. The information that you will get access to could end up saving you money and time in the future.
If you are looking for a free option, Credit Karma is a tool that gives you access to two out of three credit bureaus (TransUnion and Equifax). Although not as precise as myFICO, you will still be able to monitor trends and changes to your credit. A bonus is their app is easy to use.
Do you have credit cards?
Credit card companies typically report your balances once per month to the credit bureaus. Many people use credit cards for everyday purchases and then pay them off within the billing cycle or at a later time; this can be a great strategy if you are not incurring interest, you can earn points from the credit card companies.
These points can be used to:
• Purchase Goods
• Pay Yourself
Use caution, if you are not paying your debt balances off or down within a reasonable range (≈0-25%) before the balances are reported to the credit bureaus, it can temporarily lower your credit.
People who have credit balances that swing up and down frequently will find that their credit score does the same.
Ideally, when your credit is pulled for a mortgage, it is done when your score is peaked. Use a service like myFICO so you can make sure to time your credit pull with the mortgage lender.
By knowing when your credit card balances are reported to the bureaus, if possible, you can pay down balances before the next update to maximize your score. You can reach out to your creditors and ask them when your score is reported. There is often a specific date each lender will report the balance.
If possible, do not open any new accounts leading up to your purchase or refinance. And definitely do not open a new account when you are in process, this will complicate your transaction.
Contact a Trusted Loan Officer
Do not let your credit concerns stop you from reaching out to a trusted loan officer. A good loan officer will be able to help you navigate and best strategize.
Although the credit score is important, overthinking it and allowing it to delay your moving forward could also cost you. Mortgage interest rates are constantly changing, meaning that sometimes waiting a few points for a credit score to raise could put you at a disadvantage, especially if rates are trending upwards.
If they are trending downwards and you have time to wait, why not work on bumping your score to the next tier if it will mean interest savings on your mortgage loan.