Tips to Improve Your Credit Score for Homebuying
Banks use several factors to determine how to approve someone for a mortgage loan, including your credit score and debt-to-income ratio. Here are some tips that can help you improve your credit score.
Get to Know Your Credit Score
While there are many factors that mortgage lenders consider, your credit score is one of the most important. Your credit score is made up of multiple data points from your credit history, including how long you’ve had credit, the timeliness of your payments, the types of credit you’ve had, the percentage of your credit you’re using, and any new credit you’re applying for.
In short, your credit score represents your creditworthiness, or the likelihood that you’ll repay a loan on time.
The video below provides an overview.
What is a credit score? And how exactly does it work?
Your credit score is a number lenders use to tell if you’ll be able to keep up with loan payments.
Your score is calculated by taking all the information from your personal credit history and breaking it into five different categories.
Each category is given a different weight, but they all figure into your final score.
The mix of credit types is also important. You should have a healthy mix of credit, like credit cards, an auto loan, and a mortgage, rather than all one kind.
You should also know your credit score is sometimes called your FICO score. It’s just another name people use, but it means the same thing. Scores usually range from 300 to 850. A score of 670 or above is considered a good credit score, while a score of 800 or above is considered exceptional.
Have any specific questions about your credit score? Contact your local banker to find out more.
Tips to Improve Your Credit Score
When applying for a mortgage with KeyBank, a credit score of 620 – 640 is preferred. If your credit score isn’t quite there, there are many ways to help improve it:
- Make payments on time.
Setting up automatic payments for the minimum amount due can help your accounts remain in good standing. - Catch up on overdue payments.
If you have any bills that are past due, prioritize those first. - Pay down revolving balances.
Once you’re current on all your bills, use any extra cash to keep paying down your balances. - Correct any errors on your credit report.
If you find inaccurate personal information on your credit report, visit the credit bureau’s website to see how to file a dispute. - Use the Key Secured Credit Card® to build credit.
Our no-annual-fee1 card reports to the major credit bureaus, so it’s a smart way to help build or establish credit. - Keep existing credit lines open.
Even if your spending doesn’t change, keep the line of credit, like a credit card, open. It can show a decrease in your credit utilization ratio to help improve your score. - Limit new applications for credit.
Weigh the impact to your credit score when you’re deciding whether to do anything that will result in a hard pull on your credit, like buying a new car or applying for a new credit card.
It can take up to six months to see noticeable results.
Pay Off Your Debt to Increase Credit Score
Paying off debt could improve the likelihood of being approved for a mortgage loan in two ways: It lowers your debt-to-income ratio, an important factor that lenders consider, and it can help improve your credit score.
If you have a high amount of debt relative to your income, it can make getting approved for a mortgage more challenging. To receive a qualified mortgage, a borrower must typically have a debt-to-income ratio lower than 43%, according to the Consumer Finance Protection Bureau.2
Even if you meet the criteria for a mortgage, it’s still important to think carefully about the amount of debt you’d be taking on. It’s generally recommended that your mortgage payment take up no more than 30% of your total income. There are some exceptions, and a mortgage loan officer will be able to offer helpful advice specific to your situation.
What’s your debt-to-income ratio? And what’s it used for?
Your debt-to-income ratio – or DTI for short – is a number that compares how much you owe each month to how much you earn each month.
This number, usually shown as a percentage, helps reassure lenders you’ll be able to repay a loan and keep up with payments. So, yeah, it’s kind of a big deal.
So, how do you learn your DTI?
Start by listing all your recurring monthly debts and adding them together. Things like the minimum amount you pay on your credit card. Your mortgage, car, or school loan payment. And any expenses related to kids, like child support, sports equipment, clubs, and memberships.
Then add up the gross income you receive each month. Gross income is the total amount before taxes are taken out. This could include your salary, wages and cash from tips. Your monthly business income. And any money you get from Social Security or other sources.
Then, divide your monthly debt by your monthly income and multiply it by 100. There you have it – your personal debt-to-income ratio.
So, what does it all mean?
A high DTI means you’ll spend half or more of your income just paying off debt. Saving or dealing with unexpected expenses will be tougher to do.
A low DTI means you’ll probably have money left over after paying bills each month. In other words – the lower your DTI, the better.
Looking to better understand your debt-to-income ratio? Contact your local banker to learn more.
If you have questions, we have answers.
The home-buying process can seem a little daunting and even intimidating. Don’t worry, we’re here to help you every step of the way. We’ll take you through the entire process, answer all your questions, and always keep you prepared for what’s next. When it comes to getting you into your new home, our line is open until you close.