If you’re in the market to buy a home, you’re fortunate. The “buyer’s market” is expected to continue into 2013, with interest rates currently at record lows and expected to rise only gradually to 4 percent between now and 2014. Home sales numbers improved only slightly in September, disappointing some analysts who note that the sluggish rate of improvement shows that the housing market still has a ways to go toward full recovery. That sluggish improvement may also mean that prices will remain low a little longer than expected.
If your credit score is not what you’d like it to be, here are a few things you can do in the short term to better position yourself to apply for a mortgage. Start by obtaining your free credit report from AnnualCreditReport.com, the only website authorized to give you a free copy of your credit report each year from all three reporting agencies.
- Research the reason for your low score, and correct any errors on your credit report. A mediocre score could be due to late payments for one person and a high debt ratio for another. You’ll have to find out exactly what’s bringing your score down before you can take steps to correct it. Errors are not uncommon, and you can request correction via the credit reporting bureau’s website. Try disputing any negative report that is old and relatively small (under $500). The merchant might not be willing to make the effort to verify the information, whether it’s a true error or not, and you could see it removed from your report.
- Use an old card. Older active accounts are looked upon more favorably than newer ones – the older, the better. Keep an old card active by using it regularly for small charges, and pay off the balance each month.
- Avoid applying for any new credit. If you’re thinking of getting a new car, wait until after you obtain your mortgage. Not only will your debt-to-income ratio go up (not good), but the credit inquiry may cause a hit to your score whether you take the loan or not. Lender requirements vary, but you will generally need to show that all of your debt, combined, is no more than about 40 percent of your income (including your hoped-for new mortgage payment). Bankrate points out that if you keep your mortgage shopping to a 45 day timeframe, multiple inquiries to your credit report from mortgage lenders will be treated as a single inquiry, to account for routine loan shopping.
- Thicken up your file if it’s thin. Don’t have much credit? One to three credit accounts is considered “thin” and you might not get a loan no matter what your income is. That doesn’t mean that you should carry debt. Go for a card with a low limit, like a gas card. Secured cards can also help you build your credit, provided the card issuer reports your activity to the credit bureaus (not all do).
- Pay down credit cards and other revolving accounts. If you’re carrying balances, you should pay them off whether you’re home shopping or not, but especially if you want to be approved for a mortgage and you are willing to take on the responsibilities (and expenses) of home ownership. Start with the card that carries the highest interest rate, and then move to the next highest. Ultimately, you need to bring your debt ratio down to 36 or better (that means you may not owe more than $360 for every $1000 of available credit.) Again, your new mortgage payment must fit within that desired ratio. If you don’t have a chunk of money with which to pay your balances down, ask your credit card companies to increase your limits in order to improve this ratio. Don’t give in to the temptation of actually charging up to those new limits, though.
The bottom line is that it’s never too early or late to start cleaning up your credit. Credit expert John Ulzheimer points out that “If your low scores are caused by negative information on your credit reports and that information is accurate, you may have to live with your lower scores until the information ages off your credit reports.” But if you pay your bills on time and stop carrying credit card balances, your score will improve before you even realize it. Simply living within your means is what opens the door to car loans, mortgages and many other financing opportunities.