Getting Your Credit Score Improving Before Preparing For A Home Loan

Buying a home is a large investment and it will often involve applying for a mortgage. Not everyone will qualify for a mortgage due to bad credit. You should take the time to prepare yourself by getting your credit score improving so you qualify for the best rates and terms.

The three most critical loan factors are your credit score, your debt-to-income ratio and your loan-to-value ratio. Reducing your mortgage rate by just one percent can save you thousands of dollars. If you are considering buying or refinancing soon, start preparing your credit report about 3-4 months before you start loan shopping.

Getting Your Credit Score Improving

Your credit score is a major determinant in deciding your mortgage rate. The first thing you should do is get a copy of your credit report. The Fair Credit Reporting Act requires each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion to provide you with a free copy of your credit report, at your request, once every 12 months.

Carefully review each report and make sure it does not contain any errors or inaccuracies. Work on removing any negative information that is affecting your credit score. You can do this on your own without a credit repair service. You should focus on paying your bills on time and reducing your debt. Your goal should be to try and get your credit score above 700. Having your credit score improving will save money by getting a better interest rate on your loan and lowering your monthly mortgage payments.

Lower your Debt-to-Income Ratio (DTI)

Your DTI is a simple calculation that shows how much of your gross income is reserved for loan repayment or other long-term obligations. It represents the the ratio between your monthly debt and your monthly income. Lenders use the DTI to assess how much of a loan you can afford to pay. To calculate your DTI add up your fixed monthly expenses such as your car payments, minimum credit card payments and any other regular obligations such as student loans. Then, add your expected housing payments and divide the total by your gross monthly income. Your gross income is your monthly income before any deductions for taxes, medical insurance premiums, retirement contributions or other withholdings. Most lenders require a DTI of 36% and your housing expense should not exceed 28% of your gross monthly income.

Improve you loan-to-value ratio (LTV)

For the most part the higher the loan-to-value percentage, the riskier the loan is for the lender. The more equity you have in your property, the less chance there is that you'll default on your mortgage.

Your loan to value refers to the ratio between the amount of money you borrow on the home and the value of your home. Lenders calculate your LTV ratio by dividing the amount you are asking to borrow by the price of the home you want to buy. The difference between the loan and the value of the home is the equity you have in your property.

The lower your LTV the lower your interest rates will likely be. Most lenders require a 20% down payment. If your LTV is going to be above 80%, consider finding a less expensive home or save up for a larger down payment.

For example, if you are buying a $400,000 home and you put a 20% down payment, then you pay $80,000 of the cost of your home out of your own pocket. The bank then loans you the other $320,000. Your loan to value ratio is equal to 80 percent, since the loan amount is $320,000 and the value of the house is $400,000.

Remember, getting your credit score improving before you start to shop for a loan can help you save thousands on your mortgage. If you have an excellent credit rating and can put at least a 20% down payment you can expect to have low interest rates.

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