Hi! Welcome back! One of the first steps in preparing for your home buying journey is to review and manage your credit profile. This is actually a good exercise to do annually to assure that you have a good understanding of your credit profile, and to make sure there are no erroneous reports attributed to your accounts.

Managing your credit profile is crucial when preparing to buy a house. A strong credit profile can help you qualify for better mortgage rates and terms. Here are some key considerations:

Check Your Credit Report:

Obtain a copy of your credit report from each of the major credit bureaus (Equifax, Experian, TransUnion). You can obtain a copy of your report, free of charge, on an annual basis from www.FreeCreditReport.com.

Recent reporting has stated that as many as 1 in 4 US consumers have an erroneous issue reported on their credit report, which can be detrimental to your credit score, as well as possibly leading to identity theft.

Review the reports for any errors or discrepancies and address them promptly. This will require communicating with the entity reporting the issue and then reporting the results to each credit reporting company. This effort can obviously take an extended period, but lenders can sometimes credit you for verified issue corrections, even if they haven’t made it into the credit reporting agencies.

Check Your Credit Score:

Understand your credit score, as it plays a significant role in mortgage approval and interest rates. Aim for a score of 700 or above for the best mortgage options. However, government backed FHA loans can accommodate credit scores in the high 500’s and above. You can usually obtain your credit score from an online banking account, from supplemental sites like CreditKarma.com, or directly on the credit reporting agency sites.

Factors that are considered when calculating your credit score:

• 35% Payment History
• 30% Amount Owed
• 15% Length of Credit History
• 10% New Credit
• 10% Types of Credit

Debt-to-Income Ratio (DTI):

Lenders assess your ability to handle mortgage payments by evaluating your DTI. To determine your DTI, take your total monthly expenses, and divide it by your total monthly income, from all reportable sources. Good rule of thumb is to have no more than 39% to 45% as a maximum. You can lower your DTI by paying off existing debts and/or increasing your income.

There are a few other tips that might help to improve your credit in the short term. They are:

Timely Payments:

Consistently make on-time payments for all your credit accounts, including credit cards, loans, and utilities.

Credit Card Balances:

Keep credit card balances low, optimally 10%, relative to your credit limit. High credit utilization can negatively impact your credit score.

Avoid Opening New Credit Accounts:

Opening new credit accounts shortly before applying for a mortgage can temporarily lower your credit score.

Avoid Closing Paid Off Credit Accounts:

A longer credit history is generally favorable. You may be tempted to close an account after having paid the balance. Closing accounts also removes your available credit which will negatively impact your credit score.

Credit Mix:

Think about your credit mix. Having a mix of credit types (credit cards, installment loans) can positively impact your credit score.

Consult a Mortgage Professional:

Seek advice from a mortgage professional who can provide personalized guidance based on your financial situation.

Remember, the goal is to present a strong financial profile to lenders, increasing your chances of securing a favorable mortgage for your home purchase. It’s advisable to start preparing well in advance to address any issues and optimize your credit profile.

If you have any questions or would like to obtain the contact information of a proven & reliable mortgage professional, please contact me. Most mortgage professionals are happy to work with you free of charge & with no obligation.  I’ll be happy to let you know a few people that I have had many positive experiences working with!

Thank you for your time. This is Tom Leber with Homeward Real Estate’s Full Sale Team