If you're buying a home, you likely know how much a mortgage interest rate can impact the total cost of your monthly payment. That's why you'll want to know everything you can to get the best possible interest rate. It all starts with your credit score, which is one way that a mortgage lender determines how risky you are as a borrower. Here are some ways that you can improve your credit score to lower your mortgage interest rate.
Pull Your Credit Report From All Three Credit Bureaus
You'll want to start by getting a copy of your credit report from all three credit bureaus. You are not sure which one the mortgage lender is going to pull your credit report from, so you'll want to have all three in front of you. Thankfully, each credit bureau allows you to get a copy of your credit report each year, and you don't have to worry about paying for the report or having the inquiry impact your credit score.
Fix Errors In Your Credit Report
Now is the time to look through each credit report and find errors that need to be corrected. For example, you may have a debt that you've completely paid off, but a credit bureau shows that you still hold the debt. It takes some time for a credit bureau to fix errors on your credit report, which is why this is one of the first things you should do when you start thinking about purchasing a home.
Pay Down Credit Card Balances
A big factor that is going to impact your credit score is your credit utilization percentage. This is essentially the difference between how much you are allowed to borrow and how big of a balance you carry. Lenders look for a low credit utilization since it shows that you are responsible with borrowing money, with a high credit limit and low balance being ideal.
For example, if you have a $1,000 balance and a total credit limit of $2,000, then it shows that you're borrowing 50% of your credit limit. However, if you have a $1,000 balance on a $10,000 credit limit, this shows that your credit utilization is 10% of your total credit.
Avoid Opening New Credit Accounts
Paying down credit card balances is the best way to reduce your credit utilization since having a very low balance is also desired by lenders. However, you don't want to open new credit accounts either to increase your total credit limit, since lenders also look at the average age of all your credit card accounts. Having a single credit card that has been open for the past 10 years will show your average card account length at 10 years. Opening a single new credit line before purchasing a home will cut that average account length in half from 10 years to 5, which is not viewed as well by lenders.
For more information, contact a mortgage broker near you.
Share18 April 2023
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