The interest rate that you will qualify for, when taking out a mortgage loan, has a large impact on how much money you will be spending on your mortgage over the life of the loan. Interest rates used to be at near record lows until not long ago, but it looks like those times are over. The economy is recovering and, with it, so are the interest rates. Mortgage rates have been steadily increasing lately, causing more people to apply for mortgages. Getting a mortgage loan while the interest rates are still relatively low has determined many people who were considering the purchase of a home act now, before rates climb to an even higher level (Read: 4 Things Home Buyers Should Look Out for With Mortgage Rates On the Rise).
The difference between all-time low interest rates and current interest rates may not seem like much. One or two percent sound like a very small difference, but if you consider the fact that it is one or two percent of several hundreds of thousands of dollars yearly, you might not think one or two percent is negligible anymore. That small difference can mean tens or even hundreds of thousands of dollars over time.
Unfortunately, the increase in interest rates has also resulted in an increase in the number of people whose applications were rejected. You can learn more about this if you click here. Because people were applying for a mortgage on a short notice, in order to still take advantage of the low interest rates, many didn’t have time to make sure that they can actually qualify for the mortgage. One of the most important requirements when applying for a mortgage loan is that you have a good credit score. Buying a home with a low credit score will attract a higher down payment requirement, a higher interest rate, and, many times, rejection.
The good news is that your credit score is one aspect of your financial life that you can improve by just making a few changes and taking a few precautions. Having a good credit score will not only allow you to qualify much easier and quicker for a mortgage loan, but also qualify you for lower interest rates, meaning that you will be paying much less on your mortgage each month (Read: Boost Your Credit Quickly With These Simple Tips).
8 Ways to Make Sure You Have a Good Credit Score
A good credit score is something that you can be proud of, because it means that you are a responsible person that knows how to manage his or her finances. Unfortunately, life doesn’t always go as planned and certain events, over which you have little power, can quickly ruin your credit score, making the purchase of a home very difficult or even impossible. Avoiding putting yourself in a situation where your credit score could be damaged is ideal and should be a top priority, but sometimes things that are out of your control happen, and the only way in which you can recover is by rebuilding your credit score.
Here are 8 ways in which you can make sure your credit is up to par when applying for a mortgage loan.
- Get a copy of your credit report. You have the right to a free copy of your credit report per year. Knowing what your credit report contains is very important when trying to make sure that you can qualify for a mortgage loan. By looking over your credit report you can get a clear understanding of what your credit score is, what problems you have, and how you can start improving (Read: The Top 10 Components for Maintaining a Good Credit Score).
- Find errors on your credit report and dispute them. Errors on a credit report are not very common, but they do happen. The best way to find them is to carefully read your credit report and look for any inaccuracies or misinformation. These errors could have a large impact on your credit score, so finding them and disputing them as soon as possible is very important (Read: How Your Credit Score is Calculated).
- Pay your bills on time. The easiest way in which you can make sure your credit score is in a good range, and actually improving over time, is to not miss any payments and pay your bills on time each month. Being late for even a month can have a large negative impact on your credit score, and jeopardize your chance of getting approved for a mortgage loan.
- Avoid having too much debt. Especially before buying a home, having too much debt can seriously lower your chances of being approved for a mortgage loan. Large debt will also lower your credit score, making it even harder to qualify for a mortgage. Waiting until after you have bought a home to make any other large purchases using credit is recommended.
- Don’t take out too many credit cards. Credit card applications will appear on your credit report, and will affect your credit score. Lenders will also see you as someone who takes out too much credit, and will be reticent when deciding if they should approve your mortgage application or not.
- Keep using your current credit cards. Just having a credit card is not enough to keep your credit score in a good range. Using your cards, even for small purchases will be reported and actually increase your credit score by establishing credit history. Simply closing credit card accounts that you are not using will decrease your credit score. Click here to read more.
- Pay off some of your debt. Paying off debt will increase your credit score quicker than anything else. Your debt-to-income ratio will also improve, increasing your chances of receiving a mortgage loan without much difficulty. Having an unfavorable debt-to-income ratio will usually result in a mortgage loan application rejection.
- Extend your credit limit. Extending your credit limit will decrease the percentage of credit that you are using compared to how much credit you can use. Lenders will be more likely to extend the credit limit for a good customer, so choose a credit card with which you have had a long and clean history. Unfortunately, the credit limit extension means a new credit report check, so your credit score may decrease a little, but should recover quickly.
Making sure your credit is up to par when applying for a mortgage loan is one of the best ways of increasing your chances of approval. Interest rates are increasing, so you might think that this is your last chance of getting a fairly good rate. The truth is that it is a good idea to get a mortgage before rates climb even higher, but applying for a mortgage with a sub-par credit score will only result in a waste of time and money (Read: What Credit Score Do I Need to Qualify for a Mortgage?).