It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

It was a mixed bag for home affordability in early 2024. See the income you need to buy a median-priced home in the top 50 metro areas for details.

8 ways to increase your credit score to get the lowest mortgage rates

Lowest mortgage ratesIf you're seeking the best deal on a mortgage, you'll need to give your credit some serious attention.

Your credit report and score are two essential elements used by mortgage lenders to decide whether you'll be approved for a mortgage. The information found in your credit report is used to calculate your credit score. A higher score reflects a strong credit history and can make you eligible for the lowest possible mortgage rates.

"Generally speaking, having a high FICO Score makes it more likely a consumer will qualify for favorable loan terms," says Jeffrey Scott, spokesperson for the Fair Isaac Corporation (FICO).

Lower rates mean lower monthly mortgage payments and lower interest payments over the life of your loan. In other words, you can save some major cash by improving your credit before you apply for a mortgage. 

Here are eight ways you can give your credit a boost to get the lowest mortgage rates:

No. 1: Know where you stand

Your first stop on the path to a better mortgage deal is creating a baseline. You have to know where you stand in order to improve. Get started by running your credit reports and getting your credit score.

By law, you're allowed one free credit report from each of the three major bureaus -- TransUnion, Equifax and Experian -- every 12 months.

"Managing a good credit score should be approached like an annual health exam: It is important to do this at least every year, and more frequently, if there is a change in financial condition," says Rich Arzaga, CFP, founder and CEO of Cornerstone Wealth Management in San Ramon, California.

No. 2: Learn how your score works

While you have a variety of credit scores, your FICO score is used by “90 percent of top lenders when making lending decisions,” according to myFICO.com, the consumer division of FICO.

Your FICO score is calculated using both positive and negative information in your credit report. The data breaks down into five main categories:

  1. Payment history: 35 percent
  2. Amounts owed: 30 percent
  3. Length of credit history: 15 percent
  4. New credit: 10 percent
  5. Types of credit used: 10 percent

Every lender establishes its own criteria with regard to underwriting new loans and managing existing loans, says Scott. And credit scores are typically one factor among several that lenders consider when making decisions.

Ask the Expert: Should I look for a mortgage or fix my credit first?

Q: I've got a 20% down payment but my credit score is low. Should I look for a mortgage or fix my credit first?
A: The simple answer is "repair your credit," this will do the most good. With a FICO under 620, you’ll find it nearly impossible to find any lender willing to make you a mortgage. Even if you did locate one, the added fees and/or higher interest rate would likely make your deal very expensive.
The higher your credit score, the more options you’ll have. To get to the best interest rate for a conventional loan, you'll need to get your credit score upwards of 740. Since getting there may take a while, consider an FHA mortgage which has no added fees for lower scores, so you can get access to the best rates with a FICO near 600.

No. 3: Fix errors

Fixing errors on your credit report is a crucial step that can dramatically improve your score.

Michael McNamara, regional vice president for United One Resources in Wilkes-Barre, Pennsylvania, which provides rapid rescoring services for mortgage lenders, says he's seen a credit score increase by 40 points from one late payment correction.  

If you find errors on any of your reports, dispute them immediately with the appropriate bureau, says Scott. 

The first step is to inform the responsible credit bureau of the inaccurate information. Your dispute letter to the bureau should include copies of supporting documents, clear identification of the items you're disputing, why you're disputing the information and a request to delete or correct the error. Circle the disputed items and send the letter by certified mail, according to myFICO.com.

Next, do the same with the creditor or information provider, and explain why you're disputing the item.

Unless they consider the dispute to be frivolous, credit bureaus are required to investigate the dispute, which usually happens within 30 days, notes the Federal Trade Commission.

No. 4: Eliminate disputed accounts

Credit report errors that have been disputed are labeled as disputed accounts on your credit report. And those disputed accounts have to be closed before you apply for a loan.

Disputed accounts are not factored into the overall credit profile, says Kurt Johansson, senior loan officer for Shelter Mortgage Company in Nashville.

Because of this, lenders require the borrowers to remove or resolve the disputes so an accurate score can be calculated, he says.

You can remove disputed accounts by contacting the credit bureau and information provider and asking to have the accounts removed out of dispute.

To ensure mistakes are corrected as quickly as possible, it's important to contact both the credit bureau and the lender, bank or creditor that provided the information to the bureau, says Scott. "Both these parties are responsible for correcting inaccurate or incomplete information in your report under the Fair Credit Reporting Act," says Scott.

No. 5: Pay down your debts

"Keeping your balances low can have a positive impact on your FICO Score," says Scott. That's because your “Amounts Owed” category accounts for around 30 percent of your FICO score.

If you can swing it, paying down your credit card debt balances to at least 30 percent of your total limit is an easy way to give your score a bump, notes McNamara.

"In most cases, paying down revolving unsecured debt provides a positive impact on the credit scores, especially on files that have a high utilization ratio, thus allowing borrowers to obtain a better rate on their mortgage," says McNamara.

No. 6:  Pay bills on time

Late payments and collections leave major blemishes on your credit report, according to myFICO.com. And once you have a delinquent payment, there's not much you can do about it.

Paying your bills on time and avoiding late payment is the only way to keep a positive payment history. And the only way to improve upon a payment history is by annually reviewing your report to keep a look out for, and correct, possible errors, says McNamara.

"Credit scores are slow to improve, but very quick to drop if late payments are recorded," says Arzaga.

Johansson says that in addition to bankruptcy, foreclosure and judgments, collections and habitual late payments are the worst things to see on a credit report.

No. 7: Use credit wisely

Scott says there are three golden rules for maximizing your FICO score:

  1. Pay all bills on time, every time
  2. Keep balances on credit cards low
  3. Apply for credit only when you need it

"Do not over extend yourself," says Arzaga. "If your goal is to improve your credit score and qualify for better rates and terms, then manage your household cash flow," he says. Having better household cash flow will reduce the risk of late payments.

Another tip: Keep revolving credit card accounts to a minimum. Johansson says that seeing several revolving accounts on a credit report is a subtle red flag and, in some cases, can show the potential for overspending. 

No. 8: Don’t close accounts

This is a little tricky, says Arzaga. "On the one-hand, lenders do not want to see a lot of open credit. On the other hand, they would like to see some type of ratio of open credit to credit used."

But in general, it's never a good idea to open or close accounts prior to applying for a mortgage loan, says Johansson. It can negatively impact your score.

One way that closing an account can impact your credit score is the credit utilization calculation.

"If the balances on their remaining credit cards remain the same, then the consumer's utilization rate will increase. This may lower their FICO Score," says Scott.

The bottom line

Undeniably, it's always important to go into the mortgage process with the best potential credit position. Just make sure to give yourself ample time to find and correct credit report errors. As Arzaga says, it could take months.  "Doing this clean-up in advance will also speed up the mortgage process," he says.”

You can really improve your outlook of getting the lowest possible mortgage rates by paying your bills on time, keeping account balances low and using credit wisely.

New to the homebuying process? Check out more information from HSH.com:

(Image: frentusha/iStock)

Lillian Schaeffer April 12, 2016 11:21 pm

These are some great tips, and I appreciate your advice to figure out where you stand on your credit before getting a mortgage. My husband and I are talking about moving out of our apartment and into our first house. Before we make a decision on that, we'll definitely look into getting a credit report to see where we're at for that. Thanks for the great post!

Dan Rich April 12, 2016 3:40 pm

My credit score is below 600 and I recently got a mortgage without any trouble. I don't think credit score is anywhere as near as important and credit checking companies like to make out. It's a vague indicator at best.

Editorial Team April 12, 2016 3:56 pm

Dan, Thanks for commenting. In the U.S., credit is a very important factor in qualifying for a mortgage. If your score is low, you may still be able to qualify for certain loans, but your fees and interest rate will be higher than for someone with a higher score. Thanks, Tim Manni, HSH.com

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