The home buying process begins long before your start looking at new home listings online. One of the first steps in the home buying process is getting a handle on your finances and understanding your credit. Here are five things to do to improve your credit score before buying a new home.
- Know what’s on your credit report.
When was the last time you checked your credit report? If it hasn’t been in the last year, then you could be missing something that could be hurting your credit score. Every year, you can get your credit report, for free, from TransUnion, Equifax and Experian by going to annualcreditreport.com. While this doesn’t provide you with your credit score, it does show you what the lenders see.
- Identify and fix any errors.
Once you’ve reviewed your credit report with a fine-toothed comb, you need to start fixing any errors. On each of the credit bureau websites there are step-by-step instructions on how to dispute errors, and your credit report will have instructions as well. When contacting the credit bureaus, keep detailed notes on what you submit to them and copies of any documents.
- Always be on time.
It may seem like commonsense but if you’re looking to increase your credit score pay your bills on time every month and don’t miss a payment. Paying more than the minimum balance, even if it’s just a little more, looks good to the lenders. It also helps you pay your bills off faster.
- Pay off your credit cards, but don’t close them.
Paying off your credit cards is a great way to lower your debt-to-income (DTI) ratio. Every lender has different standards for DTI ratios, but according to Consumer Financial Protection Bureau, a DTI of 43% is, in many cases, the highest ratio a borrower can have and still qualify for a mortgage.
- Be smart with new and old lines of credit.
If you are under contract to buy a new home, opening up new lines of credit or making any large charges on your current credit card can negatively alter your DTI. This makes you look risky to lenders. If you are building a new home, it can sometimes be a six-month or longer process, so be sure to plan ahead. It is recommended to wait until after closing to buy a new car, new furniture or book that all-inclusive vacation. If you have any thing that comes up before closing consult your lender. While not opening new lines of credit is important, keeping old lines of credit open is advised. These old lines of credit show your credit history and closing them could change your DTI for the worse.