5 Tips to Improve Your Credit Rating and Lower Mortgage Rates
Lenders use your FICO® (Fair Isaac Corporation) score to determine your credit risk, or ability to repay a loan. This applies to student loans, car loans, and mortgages — to name a few. When it comes to mortgages, the higher your credit score, the lower your mortgage rate will be.
How to know whether you have a good credit score
The FICO® score takes into consideration payment history, current levels of debt, length of credit history, new credit, and types of credit used. It typically ranges from 300 to 850. A good score is usually in the range of 670. While many lenders use FICO® scores to help them make lending decisions, each lender has its own strategy. This includes the level of risk it finds acceptable for a given credit product.
The following are some tips that will help you understand the importance of, and function of, your FICO® score:
Even one late payment can reduce your credit score by more than 50 points. On-time payments are the most critical factor in calculating your FICO® score. Be consistent and diligent about making payments on time.
A creditor can report a late payment at any time, even if the payment is one day late.
A shorter late payment (e.g., 30 days) is not as severe as a later payment (e.g., 90 days).
Numerous late payments are calculated into your final FICO® credit score. One missed payment may be an oversight, while five may be detrimental to your financial portfolio.
If your score is not 670 or higher, it’s in your best interest to give it a little TLC, especially if you’re planning to buy a home soon. By improving your credit rating, you’re sure to receive the best mortgage rate.
Coming soon: the new Ultra FICO score could make it easier for borrowers with imperfect credit to qualify for a loan.
Start on the right path to successful financial management by following these five tips
Follow these easy steps to improve your credit rating for a mortgage:
1. Check your credit report
Once a year, request your credit report from the top three bureaus: Experian, Equifax, and TransUnion. To check your score for free, use Mint for your personal finances — the score is updated regularly. Or use a distinct provider such as Credit Karma or WalletHub. Receive your free copy of all 3 reports once annually from annualcreditreport.com. Of course, these days online banking accounts like Chase or CitiBank will provide you a free FICO score update once a month. You just have to log into your profile.
2. Dispute any errors
If you’ve spotted a mistake on one of your credit reports, take immediate action. You’ll need to send a letter to the credit reporting company that illustrates the inaccuracies. Consider using the FTC’s consumer dispute letter to get you started. You may want to enclose a copy of your report with the items in question circled. The FTC also suggests you send your letter by certified mail, “return receipt requested,” so you can document what the credit reporting company received. Keep copies of your dispute letter and enclosures.
3. Pay down the balance
This is especially true when it comes to high-interest cards. Ensure you pay on time monthly and make efforts to pay more than the minimally required payment. Paying your cards off in full — on a monthly basis — is ideal for achieving the best FICO mortgage rates.
Also: be sure you are not maxing out card balances. It’s much healthier to actively use a couple of cards versus just one. And — believe it or not — you shouldn’t close any extra cards that have zero balance. This will help you maintain a higher utilization limit.
4. Set up payment reminders
Setting up payment reminders only takes a few minutes, but can have a significant impact on your ability to make payments on time. This is a great step to take because making your payments on time is one of the most important factors in determining your FICO® score. You don’t want forgetfulness to sabotage your FICO® score when you have the funds to make your payment on time.
5. Improve your credit utilization
Credit utilization (or balance-to-limit ratio) measures how much money you owe creditors compared to how much credit is available to you. For example, if you have a $2,000 balance on your credit cards but have a $10,000 credit limit, your credit utilization ratio would be 20%. To improve this ratio: pay off debts, especially those close to maxing out. To receive the best FICO mortgage rates: keep your debt utilization ratio under 30%.
Though it doesn’t affect or influence your credit score, you should also be mindful of your debt-to-income ratio, or your total debt divided by your monthly income. This number is as significant as your credit score, and lenders look at it when deciding whether or not to lend you money. So, if you want a lower mortgage rate, you’re going to want a low debt-to-income ratio.
Curious where you stand? Try this debt-to-income calculator.
Once you feel you have healthy credit, start shopping around for home loans. Of course, you can shop anytime, but good credit history makes it much easier to qualify. Our in-house credit care team also may be able to help. If your credit doesn't quite meet our lending requirements, our credit care team can coach you through any credit weaknesses and may be able to help you improve your score.
While you're at it, get to know some of the most popular mortgage loan programs
If you’re looking for a low down payment option that requires minimal lines of credit or one that is open-minded to bad credit, consider an FHA loan. Assuming you have a 600 or higher FICO®score, you may only have to put down 3.5% of the home’s purchase price*. Depending on which lender you’re working with, that doesn’t mean you’re excluded from this loan option should your credit score be lower than 600. You just have to come up with a larger down payment, looking closer to 10% of the home’s purchase price. Either way, you’ll only need two lines of credit to qualify.
Another option is a conventional loan. Credit score requirements for conventional loans vary by lender but tend to require a minimum of 620. With this loan program, it’s expected you have a good credit history and overall good to excellent credit. In return, you can expect to receive some of the most competitive interest rates and loan terms.
Through a VA loan, there is no minimum credit requirement. Each lender sets its own guidelines. At American Financing, we look for scores that are at least 600 for new home purchases or 620 for refinances, both of which fall firmly in line with what other lenders require*. We, of course, review the entire loan profile before making a lending decision and do not base our decision strictly on credit score. No matter what your score, it’s always worth a call to see what you can qualify for. After all, this loan program offers some of the most attractive overall benefits to our armed forces and veterans.
You have the facts. So, it’s a great time to improve your credit rating for the mortgage process. For more ideas, be sure to check out our article on cleaning up credit for a mortgage. And always remember, the dedicated mortgage consultants at American Financing are here to guide you through options when you’re ready.
*FHA, VA, Conventional, and USDA loan requirements are subject to change. Jumbo and non-QM loans may be temporarily unavailable. As a result of COVID-19, mortgage investors are unable to support as many loans, meaning underwriting guidelines for government and conventional loans are becoming more strict.