What’s the timeline for credit repair before a mortgage approval?
Homeownership is still the bedrock of the American Dream, and the simplest path to building wealth that can be passed on for generations. In fact, the net worth of the average homeowner is exponentially higher than that of the average renter. However, despite that telling statistic, homeownership rates are also near 30-year lows right now with rising prices, stagnant real wages and mounting debt levels holding millions of would-be homeowners from buying.
Additionally, too many people don’t understand how important their credit score is when it comes time to qualify for a mortgage – the first step to buying any home. Even the timing of your credit repair is paramount during the process, as many people start far too late, only to be denied a loan approval or priced out of the real estate market.
So, today we’ll map out an ideal timeline for repairing your credit so you can get approved for a great mortgage and achieve your dream of homeownership.
First, let’s start with the fun part: the home. In fact, people often focus on the house when they’re just getting started, when they should be worrying about the financing (the mortgage) as well as what’s on their credit report.
Sure, looking at photos of listings online and going to open houses is fun, but you’re not even close to ready for that step if you haven’t sat down with a mortgage broker or lender and gotten preapproved for a loan. And what’s the first thing that mortgage professional is going to have you do? Probably authorize a credit check (as well as gather income information) so they can see what credit score you’re working with and what else is popping up there.
Of course, mortgage lenders understand that you can’t really make an offer on a home if you don’t have a solid loan prequalification or preapproval. Even if a seller wouldn’t take your offer seriously without one, you’d have a hard time closing on the loan – and the home -within the allotted 30-day escrow period, as it’s just not enough time to start from scratch, as there are just too many things that could go wrong.
So, it’s crucial that you always talk to a mortgage broker or bank in advance of your home hunting. While this step is absolutely necessary, it also doesn’t have to take long, as a lender can get you squared away within a single consultation or appointment if you have your paperwork all organized.
However, you should be working on improving your credit score well before that.
Although each borrower and home buyer is different, it’s recommended that you start reviewing your credit and invest in credit repair at least one year prior to any house purchase.
There are some loans that geared towards first-time buyers and people with average or even subpar credit. The Federal Housing Authority (FHA) guarantees certain loans that allow low down payments and much looser credit standards (sometimes even as low as 580!), but they can get expensive as they usually come with Primate Mortgage Insurance (PMI), other restrictions, and a whole lot of hoops to jump through to qualify.
But, no matter if you’re a first-time buyer or have owned for decades and just looking to refinance your existing mortgage to save money, your credit score is the #1 factor in determining what interest rate you’ll be eligible for. Numerous studies of real estate and mortgage data show that the better your credit score is generally, the lower your mortgage interest rate will be, and also the more loan options will be available to you.
So, why should you have the foresight to start looking at your credit report and come talk to us a whole year ahead of any purchase?
Well, the first thing to remember is that even though you may pay all of your bills on time and THINK you’re score is excellent, a whole lot of consumers fall victim to identity theft, financial fraud, or just plain mistakes these days. In fact, about 1 in 6 Americans are affected by data hacks and financial fraud at some point, and about 1 in every 3 credit reports contains duplicates, outdated information, or mistakes.
So, credit repair can help clean up those items (and bring your damaged score back up), but that takes time.
Additionally, credit repair before applying for a mortgage consists of two things:
1) Disputing negative information on your report, and
2) Rebuilding positive tradelines and good habits
Number one on that list takes the most time, as each dispute follows a formal process that could take months before we get resolution and see the positive effects on your score. In many cases, it takes multiple attempts at disputing the same negative item before it’s removed or remedied from your credit, so the timeline can easily take six months or longer.
At that point, we’ll also ensure that your score is going to rise as much as possible. We do this by following the best practices and guidelines laid out by FICO and others, such as paying all of your accounts on time (that’s a given), having well-seasoned accounts with good history, and introducing the right mix of high-quality revolving and installment loans.
Furthermore, if there are collections, tax liens, judgments, or past financial black marks like bankruptcies, foreclosures, etc., it can certainly take longer to clean those up.
You may also want to pay off some of your debt well ahead of applying for a mortgage and buying a house for two important reasons:
- Your mortgage lender will carefully analyze your total monthly income compared to the total bills you have to pay on all of your debts (not food, gas, etc.) every month. They’ll do this by simply going down the list on your credit report, by the way. They’ll add in the proposed new mortgage payment for the house you’re trying to buy (that’s how they qualify you for how much you can afford), and the result will be your Debt-to-Income Ratio. Banks and underwriters need to see your DTI below a certain point, so that often means paying down some of your credit accounts strategically. Again, this could take some time to do correctly if you don’t have all of the funds needed just sitting around, or you need a few months paychecks to replenish your funds for savings and a down payment.
- Next, the credit bureaus look at your debt levels, too, but they pay attention to your Credit Utilization Rate, which is just a percentage of what you owe against your total available credit. As a general rule, the lower your utilization rate and the fewer maxed out cards and accounts you have, the better your score will be. So, we may need you to pay off some of your credit cards and accounts to improve your score, which can take time for the same reason as outlined above.
In a perfect world, you already check at least one credit report every four months to watch for fraud or any errors. If you’ve had a bankruptcy, foreclosure, have serious judgments or other collections, it’s a good idea to come talk to us a year or more before you need to qualify for a mortgage.
For most people, we can sit down one year or even nine months ahead of your real estate purchase to go over your credit report, analyze your score, strategically plan paying off debt or opening new accounts, and investing in credit repair to bring it up well within the mortgage timeline – saving you as much money as possible.
Please note that these timelines are extremely conservative, as we like to err on the side of caution with something so important. That being said, we’ve helped plenty of consumers repair their credit so they can qualify for great mortgage loans when they come to us six months or only 90 days or even 30 days ahead of their home purchase!
Contact Blue Water Credit today to get a free consultation on the best ways to increase your credit score for mortgage approval.