Of all the information an underwriting team takes into consideration when evaluating your mortgage application, your credit score is one of the most important. A credit score is a measurement of your creditworthiness in the eyes of lenders, and it may directly impact your interest rate. In general, a higher credit score may coincide with a lower rate.

If your credit score isn’t where you want it to be, these tips can help you improve it:

1. Monitor your credit score online

There are many free tools for checking your credit score online, from credit bureau websites to third-party aggregators like myFico.com. Knowing your credit range may give you an idea of where you stand and helps you understand the factors affecting it.

These may include length of credit history, number of accounts, overall credit utilization, payment history and more.

While the top-tier credit score for mortgage borrowers is typically 760+, different loan types require different minimum scores. An FHA loan, for example, may be obtained with a credit score as low as 500, while some conventional loans typically require a minimum of 620. Also, if you think there is an error on your credit report, you can begin the process of having it corrected.

2. Pay all of your bills on time

Debt payment history has the most significant impact on your credit score. Late bill

payments reflect poorly on your credit and while you can’t change your payment history, you can make it a priority to pay bills on time moving forward. Use calendar reminders and automatic payments to avoid missing a deadline, keep a cash buffer in your checking account to avoid returned checks, and get caught up on past due accounts as quickly as possible.

3. Avoid opening new credit accounts

If you’re getting ready to apply for a mortgage, do not pursue any other new lines of credit – car loans, credit cards, etc. Every time you increase your debt, it reduces your overall borrowing power. In general, underwriters will ask for supporting documentation on any hard credit inquiries or new accounts on your credit report in the 6-12 months leading up to a mortgage.

New debt may impact your credit score and increase your debt-to-income ratio. This is a measure of the amount of monthly income that must be used for debt payments. When too much of your income is consumed by debt obligations, you may not qualify for

favorable mortgage terms – or any mortgage at all.

4. Limit large credit purchases

Many people put large purchases on a credit card and then pay the balance off over time. This is normal consumer behavior. However, if you’re trying to get a mortgage, avoid making large purchases on credit during the application and underwriting

process. High credit card balances can negatively affect your credit score, even if you make on-time payments.

If possible, take this advice a step further and avoid large purchases altogether, even if you’re paying in cash. That’s because you want to preserve cash on hand during the mortgage process so you don’t find yourself in a situation where you can’t make the full down payment or don’t have cash to cover closing costs. In fact, lenders factor your liquid assets into the underwriting process, so having a cash cushion can only help.

5. Try to reduce your debts

Although your debt-to-income ratio doesn’t show up on your credit report, it’s an

essential calculation of your ability to repay. Mortgage lenders generally want to see an overall DTI of 43% or less; for housing costs alone, they want that number down around 28%. That means a total mortgage payment – principal, interest, taxes, common

charges and insurance – that’s roughly one-quarter (or less) of your monthly gross income.

This is where reducing debt will help. If you have loans or credit accounts with low

balances, consider paying them off in full. And if you have a fixed installment loan with fewer than 10 payments left, you can ask your lender to remove it from their DTI calculations. If you can't pay off a debt completely, it may be beneficial to pay the

balance down because reducing your credit utilization may help to increase your credit score.

6. Try to save up for a down payment

If you’ve exhausted every strategy for increasing your credit score in the hopes of getting a lower interest rate, the next best thing you can do is save up for a down

payment. While mortgages can be obtained for as little as 0-3% down, a higher down payment can help you in several ways.

First, it may give you access to even more loan options. Second, it may result in avoiding having to pay private mortgage insurance (PMI), which can cost between 0.22% and

2.25% of your total loan every year. And third, it increases the equity you have in your home, potentially making it easier in the future to refinance or borrow against the

property.

About Biagio P. Maffettone

Biagio P. Maffettone is Vice President of Sales for Meadowbrook Financial Mortgage Bankers Corp and a Licensed Mortgage Loan Originator (NMLS ID 409994). Over more than two decades, he’s built an award-winning practice as a licensed mortgage loan

originator, sales manager, and real estate financier with New York’s leading mortgage banks. He is an expert in home financing solutions, including jumbo financing, condo/co-op, new construction, first-time homebuyer, renovation, foreign national, commercial, bridge financing/private money, fix-and-flip, cross collateralization, and FHA/VA loans.

Disclaimer: This article is made available for educational purposes only, as well as to give you general information and a general understanding of home mortgages – not to provide specific advice. By using the above information, you understand that there is no relationship between you and the content publisher. The information in this article is intended to be general and may not apply to each individual’s unique situation.