How to Get Your Credit Ready for a Mortgage

1. Check Your Credit Reports and Scores

Start by checking your credit score and credit report for free with Experian, as well as checking your credit reports from the other two credit bureaus—Equifax and TransUnion—at AnnualCreditReport.com. Your score will give you an idea of where you stand, and your reports will help you see which factors are impacting your score.

It's possible to get approved for a mortgage loan with a credit score in the upper 500s to low 600s—or lower in some cases—but your best bet for a low interest rate is to have a score in the mid-to-upper 700s.

If your credit score needs some work, check for the following issues on your reports:

• High credit card balances relative to your credit limits
• Past-due accounts, charge-offs and accounts in collection
• Loans or credit accounts that shouldn't be there (which could indicate criminal activity) and payments incorrectly listed as late or missed
• Bankruptcies, foreclosures and other major public records
• Authorized-user accounts with high balances

Your Right to Dispute Inaccurate Information

If you happen to find inaccurate or unfair information on your credit reports, you have the right to dispute that information with the relevant credit bureau. If the reporting agency confirms your dispute with its investigation, it'll update or remove the negative information accordingly.

2. Focus on Paying Every Bill on Time

Your debt payment history is the most influential factor in your credit score, and late payments can make it difficult to get approved for a mortgage. Even if you do get approved, it could cause an increase in your interest rate.

While you can't do anything about past late payments, make it a priority to pay your bills on time going forward:

• Consider setting up automatic payments to avoid accidentally missing one.
• Have a buffer in your checking account to avoid returned payments.
• If you have any past-due accounts, get caught up as quickly as possible.

3. Stop Applying for Credit

Every time you open a new credit card or loan, your ability to take on additional debt diminishes. In particular, mortgage lenders generally like to see no credit inquiries or new accounts on your credit reports in the six to 12 months leading up to your application.

That's because taking on new debt can temporarily impact your credit score, and it can also increase your debt-to-income ratio (DTI)—the percentage of your gross monthly income that goes toward debt payments—which can make it challenging to get approved for the loan terms you want.

If you absolutely need to apply for credit, be prepared to explain the reasons to your mortgage lender or consider delaying your mortgage application.

4. Limit Big Purchases

If you use credit cards for everyday spending, try to avoid putting large purchases on them in the months leading up to your application and throughout the mortgage process.

A high credit card balance reported to the credit bureaus can negatively impact your credit score, even if you pay it off by the due date.

Even if you can pay cash, it's wise to avoid large non-emergency purchases in the year or so preceding a mortgage application. Making large purchases can impact your ability to save for a down payment.

What's more, lenders will consider your cash reserves to gauge your ability to pay closing costs and cover potential financial emergencies after your loan closes, which could impact your ability to make your mortgage payments.

5. Reduce Your Debt

Your DTI isn't included in your credit score, but it's still a major aspect of your creditworthiness when applying for a mortgage loan. In general, mortgage lenders want your DTI to be less than 43%, though some loan programs go as high as 50%. For your housing costs only, lenders prefer a DTI of 28% or less. Here are some steps you can take:

• Pay off loans with low balances. If you have loans or credit cards with relatively low balances, consider paying them off to lower your DTI. Note, however, that if you have an installment loan with 10 or fewer payments left, you can ask the lender to exclude the payment from your DTI without needing to pay it off.
• Use the debt snowball method. Depending on how much time you have, consider using the debt snowball method to accelerate your debt payoff. With this approach, you'll make the minimum payment on all of your debts except for the one with the lowest balance. Put extra payments toward this account. Then, once it's paid off, apply what you were paying to the account with the next lowest balance and keep doing that until your debts are paid off.

• Pay down credit card balances. Even if you can't pay them off, paying down credit card balances can help reduce your credit utilization rate, which is another major factor in your credit score. If you have one or more cards with a high utilization rate, paying them down can potentially help increase your score.

6. Save Up for a 20% Down Payment

Like your DTI, your down payment doesn't impact your credit, but it's another factor that lenders use to determine your eligibility and loan terms.

With a conventional loan, minimum down payment requirements can range from 3% to 5%, though some lenders may have no-down-payment programs. However, the higher your down payment, the better your odds of getting approved with a low interest rate.

What's more, a 20% down payment will ensure that you don't have to pay private mortgage insurance (PMI), which can cost between 0.22% and 2.25% of your loan amount each year.

Potential ways to increase your down payment can include:

• Set up automatic transfers from your checking account to your down payment fund each month.
• Save small windfalls, such as tax refunds and performance bonuses, to put toward your down payment.
• Work overtime, add a second job or start a side hustle to increase your income.
• Ask a parent or other loved one to provide you with a loan.
• Look into down payment assistance programs.

It can take a while to accumulate enough money for a large down payment, especially if you're a first-time homebuyer and don't have a home with equity in it. But your efforts can pay off in the long run.

Monitor Your Credit Throughout the Mortgage Process

With most loans, the approval process can occur on the same day, but mortgage loans can take one or two months to close. Before closing, the lender will review your credit history again to ensure that nothing has changed. If your credit score goes down or you've applied for other credit during the process, it could negatively impact your approval odds.

As a result, it's critical that you not only prepare your credit for a mortgage application but also monitor your credit throughout the process. Keep track of your score and watch out for potential issues that arise that could hurt your chances of getting the loan.

With Experian's free credit monitoring service, you'll get access to your FICO^® Score^☉ and Experian credit report, along with real-time alerts when changes are made to your report. With this tool, you'll be able to stay on top of your credit leading up to and during the mortgage process.