There are three major credit-reporting agencies that lenders use; they are Equifax, Experian, and TransUnion. We also know that a credit score is based on credit history, debt to credit ratio, and available outstanding credit, but the credit agencies keep the rest of their formula for calculating credit scores closely guarded.
Your credit score will play a major role in getting a real estate loan, so it’s imperative that you prepare yourself in this area before starting the process of buying a home. We have compiled the following checklist to help you make sure your credit score is in good health.
Get a Free Credit Report
Did you know that the three credit reporting agencies above will give you a free credit report upon request? Yes, you can get a free report once a year, and by the way you should also request dispute forms in the process.
More than 60 percent of all credit reports have some sort of error on them, and many of these errors will negatively affect your credit score. Many times the person doesn’t even know there’s an error until they are well into the application process; this can set back a loan application months, if not adversely affect the outcome of getting approved.
It only takes an hour or so to look through your report, identify any errors, and send the dispute forms back to the credit agency. Doing this before applying for a loan will save you a lot of headaches and possibly increase your credit score too.
Review Your Debt to Income Ratio
As mentioned, your credit score is a calculation of several factors, and your debt to income ratio (DTI) is important to not only your credit score, but lenders too.
The calculation is easy. Just take all your recurring debt and divide it by your income; what we’re looking for is a percentage. The ideal number lenders are looking for is anything below 36 percent. If your credit profile reflects percentages above 36, then it is to your advantage to try and reduce your DTI number before applying for a loan. If you plan to borrow money from a relative to pay off some debts, do it a few months before applying for a loan so as to give the credit agencies time to post these changes on your account.
Close Unused Credit Cards
It’s feels nice to have a lot of credit cards available, but too much open credit can negatively affect your score.
The thought process for the credit bureaus and lenders alike is – having access to a lot of credit, even if you’re not using it, can be dangerous. From experience, lenders know human nature and historically people with excessive access to credit get into trouble. The credit agencies also take this into account, and it’s reflective in their formula for calculating credit scores.
These are a few things you can easily do before hand to make sure your credit profile is in good shape. Remember – bumping your credit score from 690 to 701 can save you thousands of dollars when it comes to better interest rates…it’s really worth the time to check your reports.