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304 North Cardinal St.
Dorchester Center, MA 02124
Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
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Buying a home is a significant milestone, and preparing your credit profile is a crucial step in ensuring you qualify for a mortgage with favorable terms. At O1ne Mortgage, we are dedicated to helping you navigate the mortgage process smoothly. Here are five essential steps to prepare your credit for a mortgage application.
Start by checking your credit report and score for free with Experian, as well as checking your credit reports from the other two credit bureaus—Equifax and TransUnion—at AnnualCreditReport.com. Your credit score will give you an idea of where you stand, and your reports will help you see which factors are impacting your score. As you review your credit reports, watch out for areas that need some attention, such as high-balance credit cards, past-due accounts, and inaccurate information.
If you find inaccurate or unfair information on your credit reports, you have the right to dispute that information with the relevant credit bureau. If the reporting agency confirms your dispute with its investigation, it will update or remove the negative information accordingly.
Your debt payment history is the most influential factor in your credit score, and late payments can make it difficult to get approved for a mortgage. Even if you do get approved, it could cause an increase in your interest rate. While you can’t do anything about past late payments, make it a priority to pay your bills on time going forward:
If you use credit cards for everyday spending, your credit utilization rate is a crucial credit score factor. It shows how much of your available credit you’re using on your cards. As such, it’s important to try to avoid putting large purchases on them in the months leading up to your application and throughout the mortgage process. A high credit card balance reported to the credit bureaus can negatively impact your credit score, even if you pay it off by the due date.
Every time you open a new credit card or loan, your ability to take on additional debt diminishes. In particular, mortgage lenders generally like to see no credit inquiries or new accounts on your credit reports in the six to 12 months leading up to your application. That’s because taking on new debt can temporarily impact your credit score. What’s more, it can increase your debt-to-income ratio (DTI)—the percentage of your gross monthly income that goes toward debt payments—which can make it challenging to get approved for the loan terms you want.
If you absolutely need to apply for credit, be prepared to explain the reasons to your mortgage lender or consider delaying your mortgage application.
While it’s important to pay down credit card balances, avoid the temptation to close old accounts once you’ve paid them off. Your length of credit history is another factor in your credit score, and getting rid of an old account could potentially lower your score in the short term. If the card has an annual fee that you no longer want to pay, talk to your credit card issuer about downgrading the account to a card with no annual fee.
Your DTI isn’t included in your credit score, but it’s still a major aspect of your creditworthiness when applying for a mortgage loan. In general, mortgage lenders want your DTI to be less than 43%, though some loan programs go as high as 50%. For your housing costs only, lenders prefer a DTI of 28% or less. Here are some steps you can take:
If you have loans or credit cards with relatively low balances, consider paying them off to lower your DTI. Note, however, that if you have an installment loan with 10 or fewer payments left, you can ask the lender to exclude the payment from your DTI without needing to pay it off.
Depending on how much time you have, consider using the debt snowball method to accelerate your debt payoff. With this approach, you’ll make the minimum payment on all of your debts except for the one with the lowest balance. Put extra payments toward this account. Then, once it’s paid off, apply what you were paying to the account with the next lowest balance and keep doing that until your debts are paid off.
While you can also use the debt avalanche method, which could help you save more money on interest, the snowball approach may be better if your priority is eliminating smaller balances quickly.
Even if you can’t pay them off right away, paying down credit card balances can help reduce your credit utilization rate, which is another major factor in your credit score. If you have one or more cards with a high utilization rate, paying them down can potentially help increase your score.
While your credit history is the most important factor mortgage lenders consider, there are several others that you’ll want to pay attention to as you prepare to apply:
Once you’ve taken steps to improve your credit and build up a down payment, you’re ready to take the next steps in buying a home. Here’s what the mortgage process looks like:
With most loans, the approval process can occur on the same day, but mortgage loans can take one or two months to close. Before closing, the lender will review your credit history again to ensure that nothing has changed. If your credit score goes down or you’ve applied for other credit during the process, it could negatively impact your approval odds.
As a result, it’s critical that you not only prepare your credit for a mortgage application but also monitor your credit throughout the process. Keep track of your score and watch out for potential issues that arise that could hurt your chances of getting the loan.
With Experian’s free credit monitoring service, you’ll get access to your FICO® Score and Experian credit report, along with real-time alerts when changes are made to your report. With this tool, you’ll be able to stay on top of your credit leading up to and during the mortgage process.
For expert mortgage services and personalized assistance, contact O1ne Mortgage at 213-732-3074. Our team is here to help you achieve your dream of homeownership with the best possible terms.
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