How to fix your credit before you apply for a mortgage
Whether you pay off your cards in full and on time every month, or are haunted by a period of reckless spending in your past, it’s crucial to make sure your credit is under control well in advance of applying for a mortgage. Anyone can be sidelined by surprises, and if you wait too long to handle them, it can hurt your chances of locking in a great rate—or of getting a mortgage at all.
Fortunately, there are plenty of ways to manage a credit challenge, as well as to strengthen credit that’s already in decent shape. We spoke to mortgage and credit experts to find out what they advise their own clients when it comes time to buy a home.
When and how to check your credit
Prospective buyers are understandably skittish when it comes to credit, and many fear that even checking their score could bring it down. This is a myth, however: as Credit Karma explains, requesting your score report is considered a “soft inquiry,” which won’t damage your rating at all. (“Hard inquiries,” by contrast, are when a lender or card company checks your score as part of their decision-making process, and this can knock off a few points.)
Rolan Shnayder, a partner with the Shnayder/Rosen team at Citizens Bank, explains that you can run reports multiple times without really impacting your score. “The effect on your score when shopping for a mortgage is a few points, and then it goes up the following month,” he says.
Another misconception of many buyers is that they have only one score, but this isn’t the case: Mortgage companies typically run reports through three different agencies, Shnayder says, which can yield slight differences from one report to another.
Small differences also arise on a day-to-day basis. Running a credit report offers a snapshot of your status at that particular moment, Shnayder explains: “If you know you’re about to run a report, your credit card balances should be no more than 35 percent of the allowable limit.” If you have a limit of $1,000, then, your current charges should be no more than $350 to yield an optimal score.
Robbie Gendels, senior loan officer with National Cooperative Bank (FYI, a Brick sponsor) adds that the best thing you can do is get your credit report from all three bureaus (Equifax, Experian, and TransUnion); one of them may have access to different loan information than the others. “You can get free credit checks from all the bureaus once a year,” she says. “If there’s something on there that is not yours, you have to let them know right away—you’ve got to stay on top of it and be proactive.”
Getting—and maintaining—a high score
Micah Curtis, a regional director with Home Loans Assist, a company that helps mortgage applicants repair their credit and get approved for a loan, says that the good news is there’s no wealth bias when it comes to calculating your score. In other words, whether you’re paying off a balance of $15 or $5,000, it will be beneficial—and missing a minimum payment of any size will be detrimental. “If you have a perfect score of 850 and then you have one 30-day late payment, your score can go down by 175 points,” she says.
Many people believe that keeping things simple and having just one or two credit cards is the best route to maintaining a high score, but Shnayder says this isn’t strictly the case. “You should have three or four different line items on the report of credit you established. If you have 15 cards and you want to close some, that's fine, but don’t get down to one card,” he says. “The credit system is looking for you to have multiple sources and actually use them and pay them on time.”
Note that your line items need not be all credit cards: having student loans and auto loans can boost your score, as long as you’re paying them regularly. Furthermore, you want all your lines of credit to be active; multiple cards that you haven’t swiped in ages do nothing to increase your score.
If you have cards that have long been inactive, rather than just closing them, Curtis suggests putting a little money on them. “If you haven’t used it in a long time, it’s a good card. FICO [the analytics company that handles credit ratings] is looking for a long history, so keep everything open for as long as possible,” she says.
And as this article from Nerd Wallet clarifies, it’s possible to have a good score with only one credit card, but you will be awarded for having a diversity of types of accounts on your report—provided that you aren’t behind on multiple payments.
How to deal with unpleasant surprises on your credit report
“I always get, ‘My credit’s great, I always pay my bills,’ but the point of running a credit report is to find things on there that you don’t know about,” Shnayder says.
He has found that his clients encounter surprises all the time. One common line item that is damaging to your score, for instance, is a collections account from a doctor’s office—it’s not unheard of to forget to pay a medical bill, and if the office never follows up with a reminder, the outstanding amount will resurface on your report. Another source of credit damage can stem from phone companies: buyers frequently find that they closed a contract and returned their phones, but neglected a final payment, and the company enlisted a collection agency to get it.
“Things like that drag your score down to where it’s not good enough to get the best mortgage rate out there,” Shnayder says. “I tell people to run their credit months in advance of shopping for home. That way, if there are errors, you have time go back and fix them.”
If there’s something more daunting than small, forgotten debts dragging down your score—and you don’t have the funds to pay it all off right away—there are steps you can take to get closer to that score of 740, which according to Forbes is considered within the “perfect” range for mortgages:
• Pay off debts, ranked by age. First, says U.S. News and World Report, tackle your oldest debt: Payments that are 90 days late or longer have the most detrimental effect on your score. Next, Shnayder advises, “Call and speak to creditors and work out a solution.” If your lateness was a once-in-a-blue-moon mistake, they might be willing to take it off your report.
• Proceed with caution when dealing with a collection agency. You’ll boost your score by paying down card balances, but it’s important to note that, somewhat counter-intuitively, paying off a collection agency can actually damage your credit. Curtis says that outside of revolving credit—that is, credit cards, store cards, and lines of credit—resolving other debts will bring the problem line item back to the very top of your credit report. “You really don’t want to be dealing with them,” she says of these types of collections. “You want us to be going after derogatory items,” adding that companies like Home Loans Assist will work on going in and removing the item from your report completely.
• Get a lower interest loan to cover higher interest one (but seek advice first). One possible fix is to get a personal loan with a lower interest rate than what your credit cards offer: “Having that actually raises your score because it’s another type of credit,” Curtis explains. “But consult with someone first before opening up a bunch of loans. Talk to a professional who understands credit, because it’s a really variable industry.”
She adds that it can take a few months for a problematic line item to turn into a positive for your score—but according to Shnayder, clients have bounced back from the most serious of credit crises.
“Once you work out a solution and fix your credit, it will take time, but the good thing with credit is that time heals all wounds,” Shnayder says. “I’ve seen people come out of bankruptcy and have scores of 700 a couple years later.”
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