Mortgage interest rates skyrocketed in 2023, making it more challenging to become a homeowner. The good news is experts predict rates will start to come down throughout 2024. When interest rates drop, borrowers with excellent credit can secure the best rates on a mortgage or refinance.
A good credit score is one of the key factors that will determine your mortgage rate. Mortgage lenders view your credit score as an indication of how likely you are to repay the loan. When rates decline in 2024, as expected, borrowers with top-notch credit scores will be in an optimal position to secure a lower mortgage rate.
Boosting your credit score can significantly affect the total interest paid over the lifetime of your loan. Even a fraction of a percent decrease in rate translates to thousands of dollars in mortgage savings. There are concrete steps you can take to improve your credit and get into the best rate bracket before applying for a mortgage.
With diligent effort, you can optimize your credit and potentially save a lot of money when interest rates fall and you apply for a mortgage. Keep reading for more details on how to boost your credit score before talking to lenders.
First Things First: Check Your Credit Score
Before you can start improving your credit score, it’s helpful to know where you currently stand.
There are a few easy ways to check your credit score for free. Credit Karma provides free access to your TransUnion and Equifax credit scores.
You can also take advantage of the free credit score monitoring provided when you have a credit card or loan account with some institutions. Check your score from a recent statement to get the most current number.
Review Your Credit Reports for Errors
An essential step in improving your credit score is thoroughly reviewing your credit reports from Equifax, Experian, and TransUnion for errors. Inaccurate or outdated information on your reports could be dragging down your score.
You can access free copies of your reports at AnnualCreditReport.com. Go through each one carefully, looking for incorrect account information, outdated negative marks, or credit inquiries you don’t recognize. If you find any suspicious or inaccurate items, dispute them with the credit bureaus immediately.
Write letters disputing the incorrect information and request that it be removed or updated. Provide as many details as possible, along with copies of supporting documents. The credit bureaus are required to investigate the dispute within 30 days. If they cannot verify the negative item, they must remove it from your report.
Cleaning up errors or discrepancies in your credit history can significantly boost your credit score. A clean credit history will help you qualify for lower mortgage rates.
Pay Down Balances and Reduce Credit Utilization
Your credit utilization ratio measures how much of your total available credit you are using. If your balances are high compared to your credit limits, it will negatively impact your score.
Experts recommend keeping your credit utilization below 30%. The lower you can get your balances in proportion to your limits, the better. Paying down balances and lowering your utilization can quickly boost your credit score as you prepare for a mortgage.
There are a few ways to tackle this:
- Pay down your credit card and revolving loan balances as much as possible. Even small payments make a difference.
- Temporarily consolidate debt via a lower-interest balance transfer card or personal loan to quickly lower your utilization.
- Ask for credit limit increases on accounts you manage well. Higher limits mean lower utilization.
- Avoid charging new purchases to your cards before applying for a mortgage. Let balances sit at lower levels.
- Make more than the minimum payment each month to drive balances down continually.
Keeping credit utilization low shows you can manage debt responsibly.
Avoid New Credit Inquiries
When you apply for any new line of credit, the lender conducts a hard inquiry on your credit report. Too many of these inquiries in a short timeframe can temporarily knock down your credit score.
To ensure your score stays high, avoid applying for new credit cards or loans in the months leading up to getting a mortgage. The exception is rate shopping for preapprovals. When you compare mortgage rates with multiple lenders in a 30-day window, the inquiries only count as one on your report.
Here are some tips for minimizing hits to your score while rate shopping:
- Research lenders and only formally apply with your top choices.
- Specify a short shop window (like 2 weeks) for lenders to pull your reports.
- Compare preapprovals first before completing full applications when possible.
- Limit applications to the minimum needed to get favorable rate quotes.
- Spread out applications over a couple of weeks rather than all at once.
With careful rate shopping, you can get the intel you need to find the best deal while keeping new inquiries low for mortgage approval.
Continue Making Payments On Time
One of the most critical factors in your credit score is your payment history. This measures your track record of making monthly payments on time. Payment history typically makes up a major chunk of your overall score.
To maximize your score ahead of your mortgage application, continue making all payments on time in the months leading up to it. Set up autopay or payment reminders to avoid any late or missed payments.
Here are some tips to keep payments on track:
- Carefully review due dates and set up autopay for at least the minimum amount.
- Sign up for account alerts to monitor balances and due dates.
- Only take on new loans if you can comfortably make the payments.
- Build an emergency fund to deal with unexpected expenses that could throw off payments.
- Contact lenders immediately if you anticipate any difficulty making a payment due date.
A solid record of on-time payments demonstrates responsibility with credit and will assure lenders you are ready for a mortgage.
Increase Length of Credit History
The length of your credit history is another key factor in your credit score. Generally, the longer your credit accounts have been open, the better your score. Having an established history over many years indicates you are a seasoned borrower who uses credit responsibly over time.
If you have a short or limited credit history, opening new accounts can lower your score at first. The best strategy is to let your existing accounts age and keep old ones open. Avoid closing credit cards you’ve had for a long time, even if you don’t use them often.
Ask lenders to increase your credit limits on longstanding accounts to demonstrate that you can responsibly manage larger lines of credit.
Keep old accounts open rather than opening new ones in the months before your mortgage application. Lengthier history with accounts in good standing will assure lenders of your experience as a borrower. Be patient and let your accounts age naturally to maximize your credit score over time.
Monitor Progress and Seek Preapproval
Improving your credit score takes time and consistency. Check your score through a site like Credit Karma every couple of months. Monitor your progress as you work on boosting your score through the steps outlined above.
It can take 6 months or more to significantly improve your credit through paying down debts, disputing errors, and building a positive history. Be patient and persistent. Once your score reaches at least 620 or higher, start seeking preapproval from mortgage lenders.
Getting preapproved means completing a mortgage application and having a lender confirm you qualify for a specific loan amount. Preapproval shows sellers you are a serious buyer who’s able to get financing. Interest rates are usually locked in for 60–90 days.
If you want to buy a home and need help figuring out where to start, focus on raising your credit score to improve the mortgage rates you qualify for. An excellent credit score is critical to your financial health and paves the way for all kinds of opportunities.
