- Lower your credit utilization: Paying down your credit cards and personal loan balances lowers your credit utilization ratio, which lenders like to see. This also helps your debt–to–income ratio. Credit utilization is your credit card balance compared to your limit. Someone with a $10,000 credit limit across all cards, and a $7,000 balance has a utilization ratio of 70%. This is too high. Pay down balances to 30% or less to see the biggest credit score improvement
- Improve your payment history: Late payments and missed payments will pull down your FICO score. Be sure to make on–time payments on all your loans and credit cards
- Check your credit report for accuracy: The three major credit bureaus – Experian, Equifax, and Transunion – make mistakes sometimes. Your creditors can report inaccurate information to the credit bureaus, too. Monitor your own credit history so you’ll notice errors before they pull down your score. The government has set up a website where you can check your credit accounts free:
- Dispute inaccurate information: If you do find inaccurate information in your credit history, be sure to file a dispute – especially if the errors include huge blemishes like foreclosures, repossessions, or collections accounts
- Remove yourself from co-borrowing accounts: If you’re a co–borrower or authorized user on someone else’s credit account, and that account is maxed out or in default, it can drag your credit score down. Getting your name removed from such accounts is a quick way to raise your score
If you’re looking to buy or refinance and know you may need to bump your credit score, it can be helpful to call a loan advisor right now – even if you’re not sure you’d qualify.
Most lenders have the ability to run scenarios through their credit agency providers and see the most efficient and/or cost–effective ways to get your scores increased. And this can be a much more effective route than going it alone.
To improve your chances of getting approval with bad credit, you can strengthen other aspects of your loan application, including:
Developing better credit habits will take longer to produce results
- Your DTI: Lenders will check your debt–to–income ratio, or DTI, to see whether you could afford your new mortgage payment. If you could pay off a few debts (or get a raise) before applying, your financial life will look better to lenders
- Your down payment: Exceeding your loan’s down payment minimum will strengthen your loan application because you’re putting more of your own money on the line
- Your cash flow: When you can show your lender a steady flow of income for the past two or more years – either through your W–2 forms or tax returns – your application may seem less risky to underwriters. A healthy balance in your savings account looks good, too
- Your choice in homes: Finding a home you can comfortably afford – instead of one that would stretch your finances every month – can help your approval odds. In a few years, once you’ve built some home equity and a stronger payday loan services Wellston OH credit profile, you can upgrade
In short, underwriters with most lenders will consider your full financial life – not just your credit score – when you apply for a home loan.
A backup plan: Fix your credit and then refinance
If you find problems in your credit history after applying for a mortgage loan, it may be too late to increase your credit score. If you continue the home buying process, expect a higher monthly payment – especially on a conventional loan.