If you’re getting ready to apply for a home loan for either a purchase or refinanced, the best way to get the best rate is to make sure your credit score is as high as they can be. The most commonly used credit score is the FICO score, named for the Fair Isaac and Company credit scoring company that developed the scoring system. Your FICO score ranges from 350 for the worst credit to 850 for the best.
The most effective way to improve your score is to begin by knowing what your credit reports are saying about you.
Years ago, it was nearly impossible for a consumer to get a copy of their credit reports from any of the three major credit reporting agencies. But today, anyone can get the reports and take the steps they need to take to correct errors and improve spending and payment habits to achieve a higher score. Getting your reports is especially critical for anyone hoping to obtain a home loan. In the U.S., every consumer is entitled to one free report every 12 months from each of the three major reporting agencies – TransUnion, Equifax and Experian. If you’ve already received your free credit reports during the past 12 months, you can still obtain your reports by paying a relatively modest fee.
When you get your reports, carefully go over everything – from current and past addresses to credit lines and public records – to make sure there are no errors. Your credit report will have an amazing amount of information about past payment behavior, including a complete list of both on-time and late payments for every credit and loan account that reports to the credit bureaus. Make sure any late payments that have been reported are correct, and if you find any errors in any information, be sure to dispute it with the agency to have it removed or corrected. Most disputes can be handled online by visiting the credit agencies’ websites.
Once you’re sure your reports are free of errors, it’s a good time to take a look at your payment history and see if there are ways you can improve your habits. If you want a home loan in a hurry, there’s not much you can do to quickly improve a payment history. But if you have some time before applying for your loan – say a few months to a year – be sure to make every payment on every account on time so your reports show you are a responsible consumer and a good loan “risk.”
Another way to improve your credit standing and get better loan rates is to pay down as many of your debts as you can. When considering you for a loan, lenders will look at the total amount of money you owe and compare that figure to the amount of money you earn. That figure is called your debt-to-income ratio. If your ratio is high, lenders will not offer you the best loan rates. Paying down your debt can improve your debt-to-income ratio and help you qualify for the best rates for your home loan.
In addition to your overall debt, lenders want to be sure you are not relying too much on credit, so they will look at how much you owe on each card or loan you have outstanding. Look at how much you owe on each of your credit accounts and compare that amount to the total line of credit you have on that account. Ideally, you want the amount you owe to be under 20 percent. What that means is that if you have a credit line of $10,000 with one card, make sure you owe no more than $2,000 on the card. Some experts say it’s best to keep your lines to below 10 percent of the total line of credit.
While it’s relatively simple to get a copy of your credit reports, getting a copy of your FICO score is much more difficult. In some cases, your lender may share it with you. You can obtain scores online that follow the FICO score, but these are not “true” FICOs. However, online scores can be very helpful for monitoring the direction your score is headed. In addition to FICO, each credit agency has its own proprietary score and you can obtain these from the agencies for a fee.
No matter which type of score your lender uses – and many use more than one – the best way to improve any score is to keep your expenditures low and pay all your accounts on time, every time. These steps can help you qualify for the best rates when you apply for your next home loan.