Having good credit is essential to getting a mortgage and getting one at the lowest rate.
You know you should use credit cards wisely, but did you know that closing an account is not one of the things to do to improve credit score? It is good for credit history to keep an old card and use it rarely – just pay it off right away. Don’t max cards out – keep your ratio of balances to credit limits lower than 30% ideally, and don’t charge up huge amounts even if you do pay them off. It is absolutely essential to always pay on time, but if you do have one “oops,” call customer service and ask for a “goodwill” adjustment based on your good record. An installment loan like an auto loan is good for your credit, and by all means, keep student loans paid up.
Don’t open any new accounts when you start thinking about buying a house. Stop and think whether opening any kind of credit card or line of credit will cause the bank or retailer to check your credit. That might be a ding against your score. Also do not open new accounts after going under contract, even if you need furniture or a refrigerator for the new house. The underwriter will be re-checking up to time of closing and this could hold up closing or increase your interest rate.
There are 3 agencies which keep track of all credit scores: Equifax, Experian and TransUnion, and your mortgage banker will check all three. Lenders will use a borrower’s middle score as an indicator. You can write ahead of time to each credit agency and get a full report or call 1-877-322-8228. Check your credit scores by going online to www.annualcreditreport.com, NOT Freecreditreport.com.
Check all 3 reports for errors and outstanding account balances that you believe have been paid. Call or write to the creditors if necessary to ask to correct errors. Write to the credit agencies to explain the errors and try to get the problems cleaned up. You don’t need to pay to have this done unless you really are too busy. A credit score above 700 is preferable, but 600 may be acceptable with some lenders if you pay a little more in interest. With conventional loans a score of 740+ gets you a preferred rate, 740-720 will get you the regular rate, and it gets a bit worse each 20 points below that.
If you’ve had a major credit issue such as bankruptcy, foreclosure, short sale, repossession or a judgment, it is vital to work to reestablish some credit after the event as soon as possible. Credit scores will improve after 6-12 months with no late payments. A big difference can be seen after 24 months, so go ahead and talk to a mortgage lender by then. Remember, people who rent rarely establish as much wealth as people who own homes!
Ask your bank or mortgage company if you have any other questions. If you need a couple of mortgage banker recommendations, your real estate agent will provide some contacts.