How to boost your credit score for a mortgage
Strategies to improving your credit score
- Paying off certain accounts alone won’t improve your score; ensure they are deleted from reports.
- Paying down credit balances to no more than 10 percent of your limit can help improve your score.
- Join a spouse’s credit account with a good payment history to improve your length of credit.
Say you have good credit. You understand how credit scores are calculated. You worked to reduce your debt, paid bills on time and maybe even pulled your credit report to check for errors. These are great steps to improve your credit score, but if you want to play in the big leagues — and get that added few-point boost to qualify for a better mortgage rate — you’ll need a more strategic approach.
When it comes to home mortgages, a key player is the interest rate, and your credit score is a major factor in determining that rate. While the Federal Housing Administration (FHA) backs mortgages for those with credit scores as low as 580 — or even 500 if you make a 10 percent down payment — these loans are often expensive, not only due to higher interest rates but to the mandatory mortgage insurance fees.
A rate reduction of just 0.5 percent could save you thousands of dollars over the course of a mortgage. If you are just a few points off of qualifying for better loan conditions, it is well worth the extra effort to boost your credit score before applying.
When applying for most mortgages — and all Fannie Mae conforming ones — your lender will request a tri-merge credit report. This is a single report compiling all of your credit information from the three credit bureaus — Equifax, Experian and TransUnion. The tri-merge is a report, not a score, and will include your FICO credit score derived from each individual report. Your lender will typically select the middle of those three scores, or the lower score if there are only two available.
To ensure that the lender gets the best picture of your credit history when they pull your tri-merge report, take stock of all three credit reports individually. FICO scores for each report are calculated based on — in order of importance — payment history, amounts owed, length of credit and credit mix. By improving each area, it is possible to raise your credit score by 25 points or more, Ali Zane, CEO of iMax Credit Repair told Scotsman Guide Media.
Comprising 35 percent of your credit score, payment history is the area in which you can boost your score the most. Removing a single collection account, late payment or federal lien from your payment history can raise your score by as much as 80 points, according to Zane.
Even if you’ve paid off the debt, however, it will remain as a record on your credit report. In order to improve your score, the item must be deleted completely. This can be done by negotiating with your creditors. Request a goodwill late payment removal for any delinquent payments. Many companies will grant this if the borrower has an otherwise reliable payment history. Contact collection agencies and request a letter of deletion in exchange for paying off the debt in full. Federal tax liens can be removed — once you have paid the outstanding balance and remained compliant for three years — by filing Form 12277 with the Internal Revenue Service.
Accounting for 30 percent of your credit score, amounts owed consists of not only total debt but the percentage of credit utilized. Installment loans and revolving credit facilities, such as credit cards, are weighted more heavily than mortgage accounts. According to Zane, you should use no more than 10 percent of your credit limit. Paying down outstanding debt to reach this threshold, transferring the balance to a family member’s credit card or moving it to a mortgage account such as a home equity line of credit can improve this area of your credit score valuation.
Credit history and mix
The types of credit you have and how long you’ve had them together account for 25 percent of your credit score. Holding just a few well-established accounts help your score the most, so it may help to pay off and close any unnecessary recently acquired accounts. Adding an account with a consistent history of reliable payments may also boost your score. See if your spouse or a family member has a credit card or other account that you can join as a joint-user. While you should avoid opening new credit accounts when applying for a mortgage, if you don’t have any credit history, just getting a credit card alone can raise your score by up to 30 points, Zane said.
Improving your credit score can take time. When removing a federal tax lien, for example, the IRS has up to 90 days to assess your request and a further 90 days to process it. With most creditors, your payment history will be updated within 30 days. One way to expedite the process is to request that your lender apply for a rapid rescore of your credit with a credit bureau. You cannot apply for this on your own. Your lender must submit documentation proving a change in your credit information that has not yet posted on your credit report, along with a fee to the credit bureau.
Discuss with your lender whether rapid rescoring makes sense for you. It is usually most beneficial when you’re aiming for a credit score improvement of just a few points to qualify for better loan conditions.