How To Repair Your Credit When You Are Preparing To Buy A Home

Buying a home is probably one of the largest investments you will ever make, and because it is such a large investment the risk of you defaulting on a mortgage loan is higher than the risk of you defaulting on a smaller loan. Because of the risk involved with such a large investment, your credit score will be a large factor in determining whether you are able to get approved for a mortgage loan and which terms will apply to your loan. If you have a bad credit history or a low credit score, you may still be able to be approved for a loan, but it will typically require a larger down payment and a higher interest rate. But don’t worry, we have some tips to help you repair your credit when you are preparing to buy a home!

Dispute Errors

Once you have thoroughly reviewed your credit report from all three credit agencies, you will likely have found at least a few errors if you reviewed the reports closely. You will want to dispute any inaccurate information you find on your credit report, including personal information such as old addresses and financial information such as late payments and debts. It is important to stay organized and keep track of your documentation here. Send letters of disputes to each of the credit agencies via certified mail. If the credit reporting agency cannot verify the questionable information that you are disputing within thirty days, then they must remove the information from your report. Once items are removed from your report, ask the reporting agency to mail you a revised and corrected copy of your report.

Pay Down Credit Balances

The next thing you will want to do is to start paying down your credit balances as much as possible. Your credit utilization ratio plays a large role in determining your credit score. A credit utilization ratio is the ratio of the balance on your credit cards compared to the overall credit limit. The higher your credit utilization ratio is, the lower your score will be. Paying your credit card balances down as much as possible will help decrease your credit utilization ratio and will also help increase your credit score. Another way to help improve your credit utilization ratio is to raise the overall limit on your credit card without raising the balance.

Remove Collection Accounts

Collection accounts on your credit report are likely going to be what hurts you the most on your credit score, and fixing the issue caused by collection accounts may not be as easy as it seems. DO NOT simply pay off your collection account and expect that your credit score will increase. Paying off collection accounts will not help increase your score unless the account is completely removed from your credit report! So, if you do have collection accounts on your credit report, see if you can make an arrangement with the creditor to have the account removed from your credit report completely once the account is paid off. Make sure to get this agreement in writing before you begin your payment arrangement. Showing your potential mortgage company this letter and proof you are making the necessary payments can improve your creditworthiness to them if you are still working on paying off the account in collections or have recently paid off the collection account.

Avoid New Loans And New Credit Cards

The closer you get to buying a home, the more important it will be to make sure you are not opening any new loans or credit cards. Applying for a new loan, such as a car loan or furniture loan, or a new credit card will show up on your credit report as a hard inquiry, which shows that you are seeking out new credit, and this looks bad to a mortgage lender when you are in the process of getting a mortgage loan. Even if you have already been pre-approved for your mortgage loan, make sure you wait until after you close on your home before you apply for any other new loans!

If you think your credit is now where you want it to be to apply for a new home mortgage loan contact American Dream Home Mortgage today! Our experts will help you compare your options and find the loan that is right for you!