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Boosting Your Credit Score Before Applying for a Mortgage

By Edward Hannah

February 12, 2015

A minimum FICO credit score of 620 is required for most lenders to approve a mortgage loan. Having a credit score that is just good enough may get you a home loan, but it can also unnecessarily cost you thousands of dollars. Let's take a look at an example of today's rates, which happen to be currently very low.

Example: 30yr loan for $150k
Score Rate* Payments* Comments
620 4.952%
$656/mo $5,479 higher costs than 700 credit score - $3,960 higher payments, $1,519 higher fees
660 4.815%
$646/mo $1,713 higher costs than 700 credit score - $360 higher payments, $1,353 higher fees
700 4.358%
$645/mo more can be saved with even higher credit scores

*These rates and payments were calculated with 10% down and were strictly based on mortgage amount after down payment not including property insurance and taxes.

As shown in the example above, just bring a 620 credit score up to a 660 on a $150k loan could save you $3,766. This could be even a greater spread depending on your lender and financial situation.

So what can you do to improve your credit score? Here are some tips to improve your credit score:
  • Pull your FREE credit report from all 3 credit bureaus at (AnnualCreditReport.com). Go through them and dispute everything. Federal Law requires a response from the creditor within 30 days or the item must come off the credit report. This can boost your credit score dramatically in a span of 60 days.
  • Some banks and credit card companies only keep late payment history for a couple of years. In this case saying you were never late on a particular account may result in your late payment history being dropped from your credit report if they don't have the records to back it.
  • While checking your credit reports, pay special attention to the Last Activity Date of each negative account. Sometimes creditor may put a recent activity date on your credit report even though you have made no such activity. An activity is defined as either a payment or use of the credit. If you have done neither of during the date reported then you can dispute this.
  • Pay down as many debts as possible, particularly credit-card debt. Try to get balances down to 50% or less of your credit limit. If this is not possible right away, ask for a credit line increase.
  • If you have any open collections, call them and make a settlement offer. Collection Agencies pay pennies on the dollar for your account. They may take 25% of what the original amount was. And never ask them if they will accept it. Just politely say that 25% is all you have available and in exchange you want them to either remove it from your credit report (sometimes this works) or mark it as paid in full.
  • Pay all of your future bills on time. If you don't currently use some sort of Autopay for your bills, then sign up for as many as you can. This will avoid accidental credit issues. It only takes 1 late payment to dramatically affect your score.
  • DO NOT close unused credit cards. This will not improve your score, but actually will lower it by increasing your debt to available credit ratio.
  • Avoid making any big purchases up to 6 months prior to applying your loan.
  • Limit credit inquiries to your credit profile up to 6 months prior to applying for a loan.
  • Sign up for credit score monitoring with myFICO or Equifax. These monitors may also have credit score simulators to help guide you.
  • If your credit score is low because of a foreclosure or bankruptcy due to a significant loss of income, consider applying for the FHA Back to Work Program, which can get you in a loan in 12 months after the event and will not penalize your interest rate.

I hope this information I have provided will help you save money on your next home purchase.

Edward Hannah