Getting a home loan? Check these items off your list first.
If you're looking to buy a home, chances are, you can't pay for it outright. Rather, you'll need a mortgage to pay it off over time. But before you gear up to fill out a home loan application, make sure to tackle these essential items.
1. Check your credit report for errors
Your credit report says a lot about you. It lists your open accounts, your various balances, and your payment history. If you have any delinquent accounts in your name, those will be flagged on your credit report as well.
It's important that you review your credit report for errors before applying for a home loan, because a simple mistake could result in you getting denied a mortgage. Maybe you have an old debt that you settled last year but is still showing up as unpaid. That could be a problem. Or, you might have a debt listed on your credit report that you never actually incurred in the first place. (This is a possibility if the actual debt holder has the same name as you or a similar Social Security number.)
You're entitled to a free copy of your credit report from each of the major reporting bureaus (Experian, Equifax, and TransUnion) once a year. But due to the pandemic, you can get free credit reports every week through April of 2022. That gives you plenty of opportunity to search for mistakes and work to have them corrected.
2. Check your actual credit score
One thing you may notice that's missing from your credit report is your actual score. Frustrating, right? But the truth is, you need to know that number before applying for a mortgage, because if it's too low, you'll risk getting denied or getting stuck with a high interest rate on your home loan. You'll generally need a minimum credit score of 620 to get approved for a conventional mortgage, and a score in the mid-700s or better to snag the most competitive mortgage rates available.
Now the good news is that you may be able to get your credit score for free through your bank or credit card company. Or, you can buy your FICO® Score at myfico.com. When we use the term "credit score," we generally mean your FICO® Score, as that's the most common scoring model used today. To learn more, you can check out our helpful guide to understanding your credit score.
3. Pay off some debt if you can
Just as your credit score will play a big role in you getting approved for a mortgage or not, so will your debt-to-income ratio. This ratio measures your existing debts relative to your income. You can divide your monthly debts by your monthly pre-tax income to figure out what your ratio is. A lower debt-to-income ratio will help you snag a better mortgage, so if possible, pay off some of your existing debt before you apply for a home loan.
If you have multiple types of debt, your best bet is generally to tackle your credit card debt first. Too much credit card debt can lower your actual credit score even if you make your minimum payments on time. On the flipside, a high personal loan or auto loan balance won't hurt your score as long as you're keeping up with your payments.
Applying for a mortgage is a big step -- so make sure you're prepared. If you manage to check these moves off your list, you'll put yourself in a strong position to get a lender to say yes.
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