Applying for a mortgage for your dream home doesn’t start with choosing a property within your budget, but rather getting your borrowing history in good shape so that mortgage lenders may view your ability to repay loans in a favourable light.
It’s crucial to prepare months in advance if you need to apply for a mortgage. Yes, you may start looking for that special house you intend to buy in your desired area.
But while doing this, it would be prudent for you to look at your current assets and liabilities and do something about them. Why? Because lenders and creditors alike are on the prowl regarding your borrowing history. And it’s always wise to make informed choices!
Why Lenders Look at Your Credit Score
Based on certain aspects of one’s financial history, a score is given to an individual using the Fair Isaac Corporation (FICO) model of evaluating a person’s credit. The score will then indicate to a lender whether or not it would be risky to lend money to that person.
People who have a good record of using credit responsibly and making payments on time are the ones lenders want to be working with. Moreover, for borrowers with higher credit scores, lenders might offer lower mortgage rates.
You’ll likely have a difficult time qualifying for a mortgage if you have previously made poor credit choices or have encountered financial hardships in the past and your credit score suffered as a result. This can negatively impact an already challenging financial situation.
Fortunately, rebuilding your credit is possible to qualify for a mortgage. Here are some tips that you can take to bring your credit score into tip-top shape.
Tips to Improve Your Credit Score
#1. Check your credit regularly for errors
Check all the information on your credit report is up to date and correct. You should take a look at whether you have any defaulted payments or other factors recorded and make sure all your accounts and credit cards are listed. You can contact the customer service department for that account if a particular detail is incorrect.
Even a small unpaid phone bill from six years or even a few months ago could have a serious impact on the mortgage rates available to you.
#2. Always pay your bills on time
Don’t ignore your bills, especially in the run-up to your application, even if your credit history is in order. It will show up on your report. Any slip-ups before you apply for a mortgage would indicate to the lender that you may not be able to fulfill your mortgage repayment obligations.
#3. Cut out any unnecessary borrowing and spending
Before applying for a mortgage loan, don’t open any new credit accounts or any big purchases within the next six months or until after closing. Opening such can reflect badly on your ability to repay any mortgage loans because it could increase your debt-to-income ratio.
If you borrow too often or too much, it would show lenders that you have too much liability, therefore may not be able to judiciously pay your mortgage dues.
#4. Close any inactive credit accounts and consolidate debts
If you want to improve your credit score before your mortgage application, closing any unused or inactive credit accounts can help.
Also, look at consolidating your debts into just one if you have multiple credit cards or loans. Otherwise, keep your credit lines open, even if you have paid them off completely. This can exemplify to lenders that you’ve been able to make repayments over a sustained period of time.
#5. Remove out-of-date financial associations from your record
Opening a joint account with another person means that their credit score can have an influence on yours. Take, for example, you may have had a joint account with your former housemates for paying bills or you might have separated from your spouse.
Ask for any outdated links to be broken and make sure you aren’t financially connected to anyone you shouldn’t be. This also includes being a cosigner. Their recent and future borrowing activity could affect your credit applications.
#6. Consider hiring a trustworthy financial planning advisor
Your advisor can help you improve your credit score by reviewing your credit report with you, assessing your finances and educating you on ways to improve your financial situation. They can also provide you with investment planning strategies that are aligned with your financial goals and help you create a budget plan.
Building a good credit history doesn’t happen overnight. But you can start by progressively saving and earning enough to take on repayments and running costs that come with owning your future home.
Your current credit status is worth knowing as it may well pay off in the long run. Start reviewing your credit history and take positive actions now! You might just be on your way to getting approved for a home loan because you’ve earned it!
Daisy Raouph, CLU, CHS, specializes in mortgage financing solutions and financial services. A Mortgage Broker and Financial Security Advisor with over 30 years of experience in financial services. Contact us today to review your mortgage financing options. We can help!