How to Improve Your Credit Before Applying for a Mortgage

How important is good credit to qualifying for a home loan? A home loan (also called a mortgage) is an agreement to borrow money and pay it back with fees and interest (the cost of borrowing the money) over a few years. The lender wants to know that you’re a safe bet to make your payments, and good credit indicates that you’ve paid other lenders in the past. Your credit scores, along with information on your income, debt, and assets, help you qualify for a mortgage.

The good news is that you don’t formally apply for a mortgage until a seller accepts your offer on a home. You have time to prequalify for a home loan, improve your credit scores, and possibly get a better rate when you apply. We’ll discuss your credit report, how to correct errors, how it contributes to your credit score, and how you might improve your score before applying for a mortgage.

What is the difference between credit scores and a credit report?

Your credit reports and your credit scores are two different things. Your credit scores are calculated based on the information in your credit report. A credit report is a statement with details about your credit activity and current credit situation, such as loan-paying history and the status of your credit accounts.1

You have many different credit scores – the three major credit bureaus calculate credit scores based on the needs of various lenders. Higher scores reflect a better loan-paying history and may make you eligible for lower interest rates.

Errors on your credit report can reduce your score in ways that don’t reflect your true borrowing history. That can lead to higher interest rates when you borrow and less money in your pocket. It’s a good idea to check your credit report and correct any errors before you apply for a loan.

How to request your credit report

You are entitled to a free credit report every 12 months from each of the three major consumer reporting agencies (Equifax, Transunion, and Experian). You can request all three reports or order one at a time. If you request one report from a different agency every four months, you can monitor your credit report throughout the year and potentially catch errors more frequently.

You can request and review your free reports by going to www.AnnualCreditReport.com or calling 877-322-8228. If you plan to buy a home soon, you may consider getting all your credit reports at once. After you’ve corrected any errors, you could monitor your reports year-round.

How to read your credit report

Your credit report is a statement with information about your past credit activity and current credit situation. It includes loan paying history and the status of your credit accounts. When you receive your credit reports, you want to confirm the information in each of these sections (they may appear in a different order depending on the reporting agency:

  • Personal Information

    Confirm that the reporting agency has your correct name, phone number, social security number, and address. Also, check for your accurate birthdate and current and previous employers. Don’t worry if there are a few variations of your name. The vital thing to look for is an address you don’t recognize, which can signify potential identity theft.

  • Accounts

    This section will list all your accounts that haven’t gone to collections or are in default. Confirm the name and address of your creditors, the status of each account, and the type of account. Then, ensure you’re correctly listed as an individual owner, joint owner, or authorized user, and validate the credit limit or original amount. Next, confirm your payment history doesn’t show errors (like a late payment) and that your account limits are correct.

  • Negative Information

    This section will list accounts that haven’t been paid as agreed, collections, and public records such as bankruptcies. If you have information in this section, make sure it’s accurate. You should immediately dispute any incorrect accounts or collections or entries older than seven years (10 years for bankruptcies) you find.

  • Inquiries on Your Credit

    This section lists events when someone checked your credit when you applied for a new account, requested a limit increase, made a housing or utility application, etc. You may see hard inquiries and soft inquiries. Both types of entries will include the name and address of the organization, as well as the date. You should have authorized any hard inquiries and should be no older than two years.

If you find errors on your credit reports, you should contact the credit reporting company that sent the report. You should also contact the creditor or company that provided the information (called the “furnisher”) as soon as possible to dispute the errors.

How to resolve errors on your credit report

If you find an error on your credit reports, you need to contact the credit reporting company and the company that provided the information (also called the “furnisher”). Your credit report should have information about how to contact the credit agency (Experian, Equifax, or Transunion) to report errors.

When you report an error, you’ll need to provide documentation confirming your identity and supporting your dispute, including a government-issued ID and a utility bill or bank or insurance statement with your name and address. You’ll also need information that supports your dispute. This information can include copies of credit card statements or loan documents, bank statements, birth or death certificates, divorce decrees, or your police report (for identity theft cases).

Once you’ve gathered your supporting materials, you can file your dispute with the credit reporting company:

You should also consider contacting the furnisher of the error. The Consumer Financial Protection Bureau provides an easy guide for writing a dispute letter you can use with your information. Make sure to keep copies of all the correspondence you provide to the credit agencies and the furnishers.

Credit reporting agencies must investigate your dispute, forward all documents to the furnisher, and report the results. If they determine that your dispute is frivolous, they must send you a notice of this decision within five days. If the furnisher corrects the error, they must notify all credit reporting companies to which it provided information. If the furnisher decides the information is accurate, you may ask the credit agency to note the dispute in your credit file and provide it to anyone requesting your credit file in the future.2

How to deal with negative information on your credit report

Sometimes a negative mark on your credit reports might surprise you, but it is not an error. If it’s accurate, don’t use the dispute process. Instead, try to resolve the problem directly with the creditor. For example, if you accidentally missed a payment, contact the creditor, arrange a make-up payment, and ask if the creditor/furnisher will rescind the delinquency. That way, the negative mark no longer appears on your reports.

A credit reporting company generally can report most negative information for seven years (beginning 180 days from the date of the original delinquency). Bankruptcies can stay on your report for up to ten years.3

If there were extraordinary circumstances that led to the negative information, such as a loss of job or illness, you might include a 100-word explanation to have when anyone requests your report in the future. You can submit your statement by mail or online. You can find specific instructions for each credit bureau here: Equifax, TransUnion, and Experian.

Understanding your credit score

Your credit scores are essential for determining whether you’ll get a home loan and what the terms of that mortgage can be. You have many different credit scores, which can differ depending on the credit, the scoring model, the type of loan or credit, and even the day of calculation.

It’s normal to see slightly different numbers when you seek out your credit scores online or from potential lenders.[4] All of them consider these factors:

  • Payment history
  • Current unpaid debt
  • Length of credit history
  • Percentage of available credit used
  • Type of debt and when it started
  • New applications for credit

Ideally, your credit reports will show a long history of making on-time payments to various lenders and have low balances with each of them. But if you’re trying to make up for mistakes in the past or starting to intentionally build credit to target a more affordable home loan, there are some steps you can take.

Photograph of set of house keys with a miniature wooden house and a small succulent

Quick ways to improve your credit score

The way you use and repay debt affects your credit scores. Paying loans on time and staying well below your credit limits help you build and keep good credit scores.4 That said, there are a few ways you can make small changes to your habits and have a significant potential impact on your credit score:

  • Schedule your credit card payments before the end of the cycle or twice each month

    One of the primary factors in your credit score is your credit utilization ratio — the amount you owe as a percentage of your credit limit. You want to keep this value as far below 30% as you are able. Paying early increases the opportunity for your creditor to process your payment before your account is reported to credit agencies. Then, you may show a lower credit utilization ratio. Early payment will also save you on interest if you carry a balance from month to month.5

  • Ask for higher limits on your credit cards

    Increasing your credit limit can be as easy as calling customer service or making a request through your issuer’s mobile app. While requesting this increase can trigger a hard or soft inquiry on your credit, the improvement to your credit utilization ratio will likely offset this. New credit makes up only 10% of your FICO credit score, while credit utilization ratios are about 30% of your score.6

  • Become an authorized user on an existing account

    If you have a responsible friend or family member willing to provide financial help, consider asking if you can become an authorized credit card user. Adding you as an authorized user gives you access to the owner’s credit activities – good and bad. The primary cardholder can add you as an authorized user by calling the issuer or logging in to an online account.7

  • Use a secured credit card

    Secured credit cards are accounts that require a deposit that serves as collateral for purchases you make using the card. If you keep your account current by making payments, the credit card issuer will return your deposit to you after a certain number of months or when you close your account. These cards are an excellent way to help you establish, re-establish, and build credit.8 You can ask your bank or credit union if they offer secured credit cards or find options online.

  • Get a credit-builder loan

    One part of your credit score is your credit mix, which can include revolving lines of credit like credit cards and personal loans. A credit-builder loan is specifically designed to help people build credit and may be available at your local credit union or community bank. This loan holds the amount you borrow in a bank account while you make payments, which the bank reports to the credit bureaus. When you’ve fully repaid the loan, you can access the money.9

Remember: opening new accounts (actually, authorizing companies to make hard credit inquiries about you) temporarily lowers your credit score. Still, the benefits of having more credit and establishing a more robust credit history may outweigh the long-term impact.

How long will it take to rebuild my credit score?

There’s no set rule on how quickly you can establish enough credit to qualify for a home mortgage or rebuild credit from adverse events. Negative information stays on your credit report for between two years (for hard inquiries for new credit) and 10 years (for bankruptcies and closed accounts). The impact of negative information may decline over time, so one missed payment in the past doesn’t have as significant an impact as the on-time payments you’ve made afterward.[10]

The most important thing you can do to establish and build credit is take out debt and pay it off from various sources. Secured credit cards and credit-builder loans may help you establish a positive payment history. Becoming an authorized user on an existing account may help grow your credit file and the length of your credit history.

Conclusions

Your credit history is integral to your ability to qualify for a home loan and get an affordable rate on a mortgage. Regularly reviewing your credit reports can help identify and remove errors that harm your credit scores. Negative information on your credit reports will fall off with time. Your credit scores can improve by accessing more credit and using it responsibly by paying your bills on time and not utilizing more than 30% of your available credit.

It can take some time to optimize your credit history for homeownership. Schedule a no-obligation consultation with an On Q Financial, Inc. team member to start building a personalized roadmap for your homebuying journey.

The content on this page provides general consumer information. It is not legal advice. This information may include links or references to third-party resources or content. We do not endorse the third party or guarantee the accuracy of this third-party information. There may be other resources that also serve your needs.


1 Source: “What is the difference between a credit report and a credit score?” Consumer Financial Protection Bureau. 1 Sep 2020.

2 Source: “How do I dispute an error on my credit report?” Consumer Financial Protection Bureau. 19 Oct 2021.

3 Source: “How long does negative information remain on my credit report?” Consumer Financial Protection Bureau. 1 Sep 2020.

4 Source: “What is the difference between a credit report and a credit score?” Consumer Financial Protection Bureau. 1 Sep 2020.

5 Source: Lindsay Konsko, “When is the best time to pay my credit card bill?” Nerd Wallet. 9 May 2022.

6 Source: Trina Paul, “Does requesting a credit limit increase affect your credit score?” CNBC. 30 Apr 2022.

7 Source: Chauncey Crail and Caroline Lupini, “Credit Card Authorized User: What You Need to Know.” Forbes. 1 Aug 2022.

8 Source: LaToya Irby. “Pros and Cons of Secured Credit Cards.” The Balance. 30 Jan 2022.

9 Source: Bev O’Shea, “What is a Credit-builder Loan?” Nerdwallet. 16 Dec 2021.

10 Source: Rebecca Lake, “How Long Does it Take to Rebuild Credit?” The Balance. 11 Apr 2022.