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How to Build a Credit Report Mortgage Lenders Will Love

Congratulations—you are starting to save for a down payment on your first house. It may take some time to get that sum together, but you can use that opportunity to tune-up your fiscal health, like getting your credit report into A+ condition.

The end goal is to make sure your credit report demonstrates to lenders that you are ready, willing, and able to make regular payments on time.

The better your credit report and credit score, the more likely you’ll get the best rate. This means savings for the entire length of the loan.  

Your credit report and credit score are not the same things, but they are closely linked. Your credit report represents the history of your borrowing, since the very first day you had credit. A credit score, on the other hand, is a numerical representation of that history, which ranges from 300 to 850 under the FICO scoring systemThe better your credit report, the better your credit score. Lenders are likely to look at both.

However, when it comes to your credit report, mortgage lenders are likely to examine a number of things, including:

  • Your payment history
  • Your total debt level to determine your debt to income ratio
  • The age of your credit history
  • Any other issues

We’ll walk through some of the things you can do to get ready.

Check Your Credit Report Early

There are three major credit reporting companies—Equifax, Experian, and TransUnion—and they provide free copies of your reports once a year through  www.annualcreditreport.com.  Many people set an annual date (for example, a birthday or the new year) to review their reports annually.

If you’re not already reviewing your report regularly, months before it’s time to apply for your mortgage, you’ll want to check your credit reports.

Be on the lookout for things like an overdue bill that’s in collections, mistakes, lines of credit you don’t recognize, or debts that are unfamiliar.

Even a small bill that’s in collections—say an old utility bill you forgot to pay—can lower your credit score. Do everything you can to resolve any bills in collections before it’s time to apply for a mortgage.

Read more: How to Read Your Credit Report

Correct Any Outdated or Bad Information

Look carefully for other information that’s not correct—addresses or contact information or lines of credit you don’t recognize. Also take a look for any disputed items that still show up even though they were resolved.

For negative items that are correct such as late payments, collections, and charge-offs, individuals can write a “goodwill letter” to  the original creditors and ask for a goodwill adjustment. You should explain your situation, why the negative item occurred, and that you are going to apply for a mortgage loan. You can ask the creditors to forgive and remove the items from your credit report. Creditors are not obligated to remove late payments from your report because you send a letter—but it’s worth trying.

If you do see something on your credit report that you’re not sure about, and your own efforts are not moving the needle, the CFPB lists HUD-approved housing counselors who can help dispute errors and clean up resolved items. You might also consider using reputable credit repair agency and often realtors can refer a buyer to one.

Make On-Time Payments

While correcting errors and eliminating resolved disputed items are necessary to build a report worthy of a mortgage, the best thing you can do is to manage credit responsibly over time.

Start by making all your loan payments—credit cards, student loans, car loans—on time from as early in your credit life as possible. Making payments on time is one of the biggest contributing factors to credit scores, according to MyFICO.com. You can often set up payment reminders or enroll in automatic payments on creditors’ websites.

Read more: The Importance of Making On-Time Payments

Get Your DTI Down

If you’re planning to apply for a mortgage in the coming year, do your best to reduce the overall amount of debt you carry to ensure your debt to income ratio is not too high. According to the CFPB, generally the maximum debt-to-income ratio for buying a house is 43%, but that’s not an absolute.

If you have a higher credit score, you may be able to qualify with a higher DTI that’s as high as 50%. There are many types of mortgage programs with some varying DTI guidelines and  some small banks offer higher DTI’s as well.

You can calculate your own DTI like this:

DTI = total monthly debt payments/gross monthly income

If you’re trying to get your DTI down, it’s a good idea to pay off your highest interest loans first—typically credit cards. Pay off debt rather than move it around; owing the same amount but having fewer open accounts may actually lower a credit score.

On that note, to keep debt at bay, you might also limit the use of credit cards or stop using them altogether, if possible, the months before buying a house. It’s critical to keep balances low on credit cards as high outstanding debt can negatively affect a credit score.

Don’t Close Long-Standing Accounts

While it might be tempting to close accounts you’re not using once the balance is zero, you might want to leave them open.

Many lenders will want to see your history of using credit over time. Having well-managed credit cards—as in you’re paying off the balance every month—and installment loans boost a credit score over time, according to MyFICO.com.

One reason to get a credit card long before you will be buying a home: Lenders view individuals with no credit cards as a higher risk than someone who has managed credit cards responsibly.

Put Time Between Other Big Loans and a Mortgage

Lastly, if you’re in the market for a mortgage soon, put a temporary pause on your other loan applications—like a car loan, student loan refinancing, or even getting a new credit card. The hard inquiries from those creditors could temporarily lower your credit score.

When actually shopping for a mortgage, you’ll want to make all of their applications within a 45-day period to minimize the overall impact on their credit score.

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