Getting your foot on the property ladder as a first-time buyer today is arguably harder than it has ever been. Credit requirements from obtaining a mortgage can vary depending on the lender and the type of loan.
Especially since the turn of the year, we have seen a general upward trend in the minimum credit score needed to take out a mortgage. While in previous years, lenders typically asked for a minimum credit score of 620, it is not uncommon for first-time buyers to require a credit score of at least 700 at the current climate.
If you are looking to apply for a mortgage, you should understand that your credit score is anything but static. Indeed, your score will often change markedly on a week-by-week basis, meaning that what you do in the short-term can be very important when it comes to improving your score.
We have put together a useful list of strategies to help you boost your credit rating to secure that all-important mortgage for your first property.
Cut Your Credit Utilization Ratio
A credit utilization ratio is a percentage calculation of how much of your available credit that you actually use. For example, if you typically carry out a monthly credit card bill of $3,000 dollars and the credit limit across your cards amounts to $10,000, your credit utilization rate is 30%. Lenders will take an average of your monthly credit utilization ratios which stretches back a determined period into the past. In general terms, the lower you ratio, the more favorably a lender will look upon your mortgage application.
Keeping your credit utilization ratio below 30% is advisable. Ways to lower your credit utilization ratio include paying off any outstanding debts. It is a good idea to pay off your credit card using multiple repayments throughout the month rather than in a lump sum at the end. This will protect you from negatively impacting your credit report if your creditor reports your monthly balance before the date that you tend to pay it off every month. If this happens, your credit report with show a credit utilization rate which is much higher than it is in reality.
Another simple tactic that you can use to lower your credit utilization ratio is to ask your lender to raise your credit limit. A $3,000 negative balance is a much lower proportion of $20,000 than it is of $10,000.
Keep Up with Bill Payments
The factor that weighs the heaviest on your credit score is your bill payment history. If you have a history of regularly missing payment dates, it will show up on your credit report and prove to be a significant black mark against your name.
Your bill payment history constitutes 35% of your score, so it is important to make sure that you do not miss any payments. Keeping a tight rein over bill payments does not just apply to your credit cards. This also counts when it comes to phone bills, utilities, rent and student loans, as well as other everyday obligations.
Keep Your Credit Cards Open
At this point, you are probably contemplating getting rid of your credit card altogether. But before you do so, think for a second about the effect that this will have on your credit utilization ratio. Less available credit could cause this ratio to jump dramatically, which will have a knock-on negative effect on your credit score. Keep your credit card but try to cut down on how much you use it.
Do Not Apply for More Credit
Another thing that you should avoid at all costs is to apply for new lines of credit. Every time you apply for credit, a lender will perform what is known as a ‘hard inquiry’ which will show up on your credit report. Having a large number of hard inquiries on your credit report will damage your credit score in the short term. When a mortgage lender comes to check your credit report, such credit applications will show up as a red flag against your name, increasing the likelihood that your mortgage application will be rejected.
Piggyback on Someone Else’s Good Credit Score
A great way to improve your credit rating is to persuade someone with a good credit rating to add you as an authorized user on one of their accounts. Being named as an authorized user on an account which has a good record of meeting repayments on time will boost your credit score. You do not have to use the card or even know anything about the account – all that counts is that your name is associated with it.
Make sure that you choose someone who you know does not regularly miss bill payments, have a credit utilization ratio of above 30% or do anything else that may lower their credit rating. If this happens, your credit rating will suffer in the same way that theirs does.
Keep Track of Your Credit Report
If you did not know this already, you can access your credit reports from the three main credit bureaus (Equifax, Experian and TransUnion) using a number of free online services. Once you have a copy of your report, it is a good idea to sit down and spend some time examining it for any inconsistencies. Common issues may include incorrect name or address, duplicate entries, incorrect account statuses or credit lines that do not belong to you. Dispute any errors that you find when you go through the breakdown of your credit report with a fine-tooth comb with the credit bureau in question. If your claim is found to be valid, you can have items that may otherwise be looked upon unfavorably by mortgage lenders expunged from your record.
We are now in times of unprecedented economic insecurity. Mortgage lenders have tightened lending standards, and a good credit score is now more important than ever. If you are making your first incursions into the housing market but are worried about your ability to secure a mortgage with your current credit score, do not worry. By taking the measures detailed above, you can help to lift your score enough to become the first-time owner of the house or apartment that you have been dreaming about.
Photo by Tierra Mallorca