What Every Homebuyer Should Do Before Shopping for a Mortgage
One of the smartest things you can do before you start shopping for a home is to get your financial house in order. Simply put, the higher your credit score, the more likely you are to qualify for a loan and to get a lower interest rate.
This summer, your credit score will matter even more because Fannie Mae (a major mortgage lender that many private lenders use to write loans) is going to begin looking into the credit scores of borrowers a little more closely. Right now, Fannie is only looking at whether a borrower has been paying his or her loans on time. Sometime this summer, Fannie will begin using trended credit data—which means they’ll be looking at the exact monthly payments a borrower has been making on his or her credit cards, mortgages, and student loans.
The change should help lenders more accurately assess a borrower’s risk. But what does it mean for homebuyers? The importance of having a solid credit score going into the home buying process will be even more significant than it is today.
Because your credit score is nearly as personal to you as your DNA, it’s impossible to say whether this change at Fannie will be universally good or bad for everyone. But if you want to improve your credit score, these three general tips are sure to help.
Pay your outstanding loans on time. About a third of your credit score is based on your payment history. If you always or nearly always pay your loans on time, it’ll tend to push your credit score up. If you don’t, your score may go down. But don’t freak out if you’ve missed a payment or two over time—especially if other parts of your credit history are in good shape.
Don’t use a high proportion of the credit that’s available to you. A lot of people mistakenly think the more you owe the lower your credit score. That’s not necessarily true. The real number credit scoring agencies are interested in, and grading you on, is how much of your available credit you’re using. If you’re maxed out, it’s going to hurt your score. If you have a lot of credit available to you but are only using a small portion of it (even if the balance is quite large), your score won’t suffer.
Don’t open new credit lines before you start shopping for a home. When you open multiple lines of credit in the weeks or months before you start shopping for a mortgage, credit scoring agencies and mortgage lenders tend to look at that as an increased risk that you might not be able to make your mortgage payments, and it could damage your credit score.
One other factor that can work in your favor is something that’s out of your control. Having a long credit history—especially if it’s a sound one—will work in your favor and generally improve your score.
If your credit score isn’t where you’d like it to be, and you want to improve it, some services will—for a fee—review your credit and give you specific advice on actions you can take that will raise your score. Talk to your lender. Often they work with these companies and include a promotional code on your mortgage application that can connect you to one.