For anyone trying to get a mortgage for their first home, an excellent credit score is one of the keys to securing a lower interest rate. A high credit score also increases your chances of securing a mortgage loan. This is why it is very important that you increase your credit score before applying for a mortgage, or searching for a home.
Depending on where you intend to get your mortgage loan, you might require a minimum credit score between 580 and 640. FHA requires the lowest credit score for a lender, which is 580, but would require a down payment of 10% of the total mortgage cost. USDA Loans, on the other hand, require a credit score of 640 and above but offer lower interest rates on their loans.
Here are a few ways to increase your credit score, and buy your first home:
- Request for a Credit Report and Dispute Errors: Hey, no one likes being billed for something they never even used in the first place. But having your credit score dropped because of the spending habit of someone else, or the wrong documentation is even worse. The first step to increasing your credit score is making sure that there are no errors on your credit report that might tank your credit score. I know you might be thinking, “what are the odds of an error occurring?” However, according to a report by the Federal Trade Commission; one in five consumers has an error in their credit reports. This is a whopping 20% of consumers.
Annualcreditreport.com is the only federally authorized website for free credit reports provision. Make sure you check the reports provided for errors like incorrect names and addresses, duplicate entries, and more.
You can check your free credit report for errors yourself, or employ the services of a credit repair company like Classy credit repair services.
- Paying Debts: This one is a no brainer actually. You need to get better credit scores; therefore, you need to pay off your debts to get your credit scores to go up. Many lending companies prefer that your total debts make up a small portion of your total monthly income. One way to do this is by paying off previous loans so that their monthly payments go away. This way, your debt to income ratio reduces significantly.
- Lower Credit Utilization Ratio: Your credit utilization ratio is essentially how much you owe divided by your credit limit. Therefore, if, for instance, you have a total credit limit on all your credit cards of $15,000, and you only use $1,500 every month. Then your utilization ratio is 10%. This is a good ratio to have. A good rule of thumb is to keep your credit utilization below 30%.
Another way to improve your credit utilization ratio is to request a credit limit increase. This has the potential to lower your credit utilization ratio even if you still spend the same amount per month.
- Make multiple payments monthly: This one is more of a trick. If you are the type that runs up your total credit limit and pays it off every month. This is for you. While you always pay off your debt monthly, this also means you have a credit utilization ratio of 100%. Therefore, you should pay off your credit card debts twice or three times a month to help reduce your utilization ratio. This is because creditors report balances only once, and there is no way of knowing when that is. It is, therefore, safer to pay off your debt multiple times per month.
We hope that with the tips above, you can increase your credit score and buy your first home with ease.