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4 ways to clean up your credit before you buy a home

Est. 3 min read

So you’ve been saving money to buy a home. You know where you’d like to live, and you’ve even narrowed down your list of home must-haves. You can practically picture your home-to-be. But, before you start house-hunting, you might want to make sure your credit is healthy.

If you’re planning to apply for a mortgage, your credit health will be a key factor in determining how much interest you’ll pay on that home loan, or if you’re even approved. According to the credit bureau TransUnion, a high credit score lowers your interest rate and thus your monthly mortgage payment, whereas a low score will result in a higher rate and payment.

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You’ll also need to have a credit score, also known as FICO score, above 700 to get a conventional mortgage from most lenders (although you may be able to apply for a government-based Federal Housing Administration loan if you have a FICO score of 580 or higher.)

For this article, let’s assume you plan to apply for a conventional mortgage and need help improving your credit to bring you one step closer to getting approved for a loan at the lowest interest rate. Here are four steps you can take to position yourself in the best light:

1. Monitor your credit report.

Start monitoring your credit report months before you apply for a mortgage by getting free reports from all three credit bureaus – TransUnion, Experian and Equifax – at annualcreditreport.com. If you notice any inaccuracies, this is likely to result in a lower credit score than you should rightfully have. It’s your job to get this rectified.

2. Dispute those inaccuracies.

Now it’s time for you to make sure those mistakes on your credit report – such as a fraudulent credit account in your name – are corrected. This is easier said than done. Correcting those inaccuracies may take several calls and letters to annualcreditreport.com as well as the three credit bureaus. While you’re writing and calling the credit agencies, you can also contact the entity that reported your information to the credit bureau. For example, if you see an unpaid utility in your name that shouldn’t be there, you can try contacting this company directly to see if it will correct this.

Years ago, I had to go through this process after I was the victim of identity fraud. I lived in Boston yet discovered several fraudulent accounts in my name in Dallas, Texas. It took several calls and letters to department stores, utility companies, a leasing agency and the credit bureaus to get these removed from my credit report.

3. Pay off outstanding bills and clean up your act.

Mortgage companies want to see that you’re reliable and will make payments on time. If you have unpaid account information or high credit card balances on your credit report, this won’t help your situation. To remedy this, start paying off these debts. By doing so, you’ll also lower your debt-to-income ratio which signifies the amount of debt you have relative to your income. If mortgage lenders see that you have almost as much debt as income, they may be hesitant to approve your loan. Why? Because they may think you won’t be able to pay your mortgage payments. Along these lines, late payments on your credit report will also drag down your credit score, so start paying your bills on time.

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4. Be careful when applying for new credit.

This becomes even more mission-critical when you’re ready to apply for a mortgage. Opening up a new credit card, for example, can lead to credit inquiries which can negatively impact your credit score. Because mortgage lenders use this score to help decide whether to lend to you and determine your interest rate, you’ll want your FICO score to be as high as possible. To play it safe, it’s a wise idea to hold off on applying for that new credit card until you are approved for a mortgage and purchase your house.

As a final word of advice, start cleaning up your credit act early. It can take months for your credit score to rise. Remember: Your efforts can save you hundreds of dollars a month in lower mortgage payments.

Published on October 3, 2016

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Robyn Parets is a personal finance and business writer based in Boston. A former writer for Investor's Business Daily (IBD) and NerdWallet, Robyn is also the founder and owner of Pretzel Kids®, a children's fitness brand and online training course. You can find her on Twitter @RobynParets, follow her musings at Away From Om, or reach her via email at robynparets@gmail.com
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