How to Increase Your FICO Score Before Applying for a Home Loan
It’s no secret that increasing your FICO score gives you more options when applying for a mortgage.
Solid credit generally means an easier qualification process and access to better interest rates. Lower rates could translate to huge savings throughout the life of your home loan. Beyond mortgages, higher credit can help you qualify for more favorable financing for auto loans, credit cards, and more.
Here are some ways you can boost your FICO before applying for financing:
Check Your Credit Report
Without an understanding of what appears on your credit reports, you won’t know if you have reporting errors or fraudulent activity. Knowing this will help you dispute those mistakes and boost your FICO score.
Fortunately, you can do this at no cost to you. The FACT Act of 2003 allows you to pull one free credit report every twelve months from the big three bureaus: Equifax, Experian, and TransUnion.
Pay Down Existing Debt
Paying down your existing debt can go a long way towards improving your FICO score.
Lenders will consider how much you owe when approving or denying applications. To measure this, they use a DTI (Debt to Income) Ratio. Lowering that unsecured debt or eliminating it – if possible – can help you become a more attractive prospect.
Avoid Closing Accounts (and Opening Them Too Soon)
While having many credit lines may give lenders pause, they do want to see some debt being utilized.
Opening or closing accounts before applying for a mortgage can hurt your chances. Lenders like to see low credit utilization rates. That’s why paying down credit card balances can help increase your FICO score, since you’re lowering the amount of credit card debt you have.
One way to decrease your debt utilization is by increasing the credit limits on your cards. However, recent credit hits could backfire, leading your bank or credit union to decrease your limit.
Pay Your Bills On-Time
The fastest way to tank your FICO score is by paying bills late or letting them go to collections. Paying consistently on time and checking your credit reports for errors is a great way to steadily increase your FICO score.
Apply for Credit as Needed
Keep your lines of credit and debts to a minimum. The last thing you want to do is take on too much debt and over-extend yourself financially.
General Tips Before You Apply
Increasing your FICO score is an important factor in getting more favorable financing. However, there are some additional things to keep in mind prior to applying for a mortgage:
- Avoid applying for new credit right before applying
- Keep existing credit card accounts – you need to show some credit utilization
- Avoid maxing out or overcharging credit cards – again, low credit utilization is ideal
- Maintain your current job and avoid switching jobs in during the process
- Don’t consolidate credit card debt on one or two cards
- If you can, pay off collections, judgments, or tax liens reported within one year
- Don’t make any large purchases like cars or expensive home electronics
- Stay current on any existing accounts
- Avoid making large deposits into your accounts – especially difficult to explain cash deposits
