Whether you are getting ready to purchase your first home,, refinance an existing home, or are hoping to take out a mortgage on a new retirement property or rental property, credit scoring is going to be something on your agenda. We tend to not think much about credit history until it comes time to sign a mortgage application, business loan, or perhaps buy a car, but it is always there in the background. When it comes to getting your credit history in the right shape, consider these four tips from our experts at Mortgage Maestro Group.
WRITE IT OUT
The benefits of writing out or journaling important information during a home purchase are significant. Consider starting a word document or just grabbing a notepad to jot down numbers and information. When it comes to drafting a section for your credit history, make notes of existing loans, any past credit scores you may know of, current scores from different sources, personal budget information, and anything else that may be relevant.
This can be as simple or as complex as you like, but whether it comes in the form of a 30-column Excel sheet or a handwritten note, it is always better to have some numbers in front of you.
The factors that go into your credit score may not always make the most sense on the surface, but there are still ways to position yourself in the right light. One example is the length of your credit history. It can often be beneficial to keep older accounts active, even though they may not be used very much, simply for the reason that they will bolster your credit score. Don’t consolidate existing accounts prior to looking at a new mortgage, even though it may seem like the sensible thing to do if you are newly married, for example.
Another important part of your credit score equation is utilization, or the ratio between your credit limit and the amount you owe creditors. It will be in your best interest to balance this by reducing the amount you owe in credit. Try to avoid large purchases in credit in the time period leading up to your mortgage, paying cash when possible. This will keep your utilization on the positive side and may improve your credit score. In general, a utilization of 30% or less is the goal. Another way to improve utilization is to ask for an increased credit limit on a credit card, which will shift the ratio in your favor without the need for changing your payment plans. One hack you can implement is what we call the mental credit limit. Set this at 30% of the card limit and stay below that at all times, if possible.
Applying for a mortgage loan is one of a few different actions that can result in what is known as a “hard inquiry” to your credit history. These occur when financial institutions make a formal inquiry into your credit because you have requested an auto loan, asked to open a new bank account, or made some other significant financial decision. Hard inquiries can impact your FICO score, and should be avoided in the run-up to a mortgage application if possible. Keep a record of transactions that might impact your utilization or prompt a hard inquiry in your journal, that way you and your mortgage lender will have a better understanding of how they might affect your credit score.
Have more questions about how to get your credit mortgage-ready? Call the Mortgage Maestro Group for more information! 303-779-0591