How to Clean Up Your Credit Before Applying for a Mortgage Guide

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When it comes to credit profiles, what is expected of you to be worthy of a mortgage? Is it a score of over 680? Maybe it’s limited unsecured debt or a bit of both?

To keep things simple: the better your credit, the less likely you will default on a loan. Meaning your chances for mortgage approval are higher than they’d be with poor credit, at least that’s how lenders see it.

So before you start applying for mortgages, take some time to review your credit score, spending habits, and overall debt. The following checklist can help you clean up your credit, so you’re on track to finding the best loan program.

Practice smart credit management

Take a look at your spending, your overall financial health, and your current debt. To clean up your credit, you should be practicing smart credit management, such as:

  • Diversify your debt. Keep a healthy balance of installment debt (loans) and revolving debt (credit cards).
  • Keep credit card balances low. It’s an easy way to avoid high-interest fees.
  • Only charge what you can afford. Never charge more than you have.

Understand the factors that impact your credit rating

Next, take the time to understand what affects your credit rating.

  • Payment history. Are your bills paid on time?
  • Credit utilization. Your credit utilization is the ratio between your statement balance and how much credit is available to you.
  • Credit mix. Your credit mix includes car loans, credit cards, or student loans. More is usually better, so long as you can manage it.
  • Length of credit history. How long have you been taking on and managing debt?
  • Recent credit. How often do you open lines of credit or get your credit checked? Note: soft inquiries, like the credit checks you perform on your own, don’t typically hurt your score.

Check your credit score

Remember, soft inquiries do not cause bad credit. So, don’t be afraid to request your credit report from the top three bureaus: Experian, Equifax, and TransUnion. You can do so once a year for free.  You can also consider using: Credit Karma or WalletHub, or

Curious about the additional ways to monitor your credit?
Learn to Monitor Credit

Know what lenders look for

While your credit rating plays a vital role in qualifying for a mortgage, it’s not the only factor that lenders consider. They also want to know your:

  • Employment history.  How long you’ve been with your current employer and do you have a stable work history?
  • Credit inquiries. How many credit cards do you have? Do you open them frequently?
  • Outstanding debt. How much of a debt obligation do you currently have (since this accounts for 30% of your FICO score)?
  • Ability to manage debt. Are your payments on time? Do you only pay the minimum monthly requirement?
  • Public records. Do you have any bankruptcies, foreclosures, liens, or collection items?

Be proactive to avoid poor credit

Ready to clean up your credit? Here are four strategies to consider implementing right away.

1. Apply for loans in a 45-day period

According to Bankrate, if you’re applying for installment debt (mortgage, car loan, or student loan), you can minimize credit score damage by completing all applications within a 45-day period. When you do that, the inquiries are considered one. Unfortunately, that does not apply to credit cards since there is no credit-application grace period.

2. Avoid being a co-signer

When co-signing for someone else’s loan or credit card, that entire debt attaches to your credit report. Ask yourself if your credit can handle that responsibility, and what's the benefit to you?

3. Keep credit cards open

Most people think it’s a good idea to cancel a credit card once the balance is paid off. That’s not the case. Since a portion of your credit score is determined by your overall credit, eliminating a card can damage your score. For example, let’s say that between your loans and lines of credit, your total available credit is $22,000. According to Money Crashers, if you use $12,000 of this available credit and $5,000 of it is from the card you are closing, your available credit drops from $22,000 to $17,000. That would probably be a good thing if the card had no balance, but if the card you are closing is “maxed out,” your used credit remains at $12,000. This sudden increase in your debt/credit ratio (from 54.5% to 70.5%) will drop your score noticeably.

4. Receive guidance from a trusted lender

If you’re just shy of meeting home loan program qualifications, the American Financing in-house credit care team can coach you through credit weaknesses and next steps. They will get you started on removing credit inaccuracies, and improving your overall score, so you’re able to purchase a home.

The minimum credit score you’ll need to buy a home depends on your loan program. And, the loan program you qualify for depends on all of the above factors. For best results, clean up your credit and be patient. Understand that bad credit won’t go away overnight. It may feel exhausting, but the most significant savings will accompany a solid credit score.

Understand how your assets and financial reserves help you buy a home.
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