Before applying for a loan, there are three key things that can be done to help qualify for the best possible lending available.
Step 1: Understand your credit. Credit reports and scores are a major part of a mortgage loan application. A mortgage professional will check scores from the three major credit reporting agencies-TransUnion, Experian, and Equifax. Having scores above 620 will help to ensure you qualify for lending. Higher scores = lower interest rates.
The five factors that are used to determine your credit scores are:
- Payment History-35%
- Amount Owed-30%
- Length of Credit History-15%
- New Credit-10%
- Types of Credit-10%
Step 2: Correcting negative inaccuracies. People have multiple options for obtaining their credit report. Besides obtaining it from a mortgage professional, online options are probably the easiest and most convenient way to see where you stand. Websites such as www.annualcreditreport.com and www.myfico.com are a great place to start. Getting a credit report allows you the opportunity to review your credit to make sure everything is reported accurately and in your favor. If you do see errors on your report, the Fair Credit Reporting Act (FCRA) allows consumers the right to dispute these errors with the credit reporting agencies.
Step 3: Pay down credit card debt. Debt Utilization, the percentage of debt in relation to the credit limit on credit cards, accounts for 30% of your credit score. To help increase credit scores, it is important to focus on this area. Debt Utilization only takes into consideration revolving debt (credit cards, lines of credit, over-draft protection accounts, etc). Ideally, you should try to maintain a balance of 10% or less of your credit limit.
In addition, monitoring your credit a few times a year is also very important to ensure that the information continues being reported accurately. It can also help consumers to identify fraud or identity theft. Focusing on these factors will help to build and maintain favorable credit into the future.
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