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7 Steps to Repairing Your Credit Before Getting a Mortgage
Like many Americans, purchasing a home may be one of your goals in your life’s journey. After all, nearly 65% of people own their homes.
As part of the home search process, you will likely need to get pre-approval for a mortgage so that you can move forward. You wouldn’t want to find your dream home, only to find out that due to your credit score you won’t be able to be approved for your home loan, or you will receive a ridiculously high-interest rate.
If you have issues on your credit report due to errors or payment issues, it is important to understand that it will take time for these to be fixed, so the sooner you start the process the better. It can take weeks or even months to have your credit report updated with each of the three major credit bureaus (Experian, Equifax, and Transunion).
Here are some tips to take when working to improve your credit score ahead of a home purchase.
Check Your Credit Report and Fix Errors
If there are inaccuracies on your credit report, it can take a month or longer to have them corrected. You should be checking your credit report at least annually, but more often if you are planning for a major purchase like a home.
You can get a free copy of your credit report annually from each of the three major credit reporting agencies at the Annual Credit Report website. You will want to review each credit report separately, as the data contained in each file may not be identical. In light of the COVID-19 pandemic, the three credit bureaus are offering free weekly credit reports online through April 2021.
If you find mistakes, you can file a dispute directly with the agency in question to have the data corrected. When you file your dispute online you will also have the opportunity to provide any documentation necessary to support your dispute claim.
The process of working with the credit bureaus to have errors corrected can be time-consuming. You might find it helpful to hire the expertise of a reputable credit repair company to move the process along.
Working with a credit repair company can be convenient, but there is a cost. If you are on a strict budget, you can work directly with the credit reporting agencies to correct your credit reports at no additional cost. Also, credit repair companies cannot make you any guarantees about the ability to change your situation.
However, it can be worth the expense to save time and stress by enlisting the help of experts to get these matters resolved.
Focus on Your Payment History
One of the best ways to increase your credit score is simply to pay your bills on time. Payment history generally accounts for more than 1/3 of the impact on your total credit score. Good payment history is crucial when you are looking for a home loan. Even a few recent late payments can result in higher interest rates or the potential for your loan application to be denied.
Pay Down Those Credit Card Balances
Even if you pay your bills on time, having high balances on your credit cards can hurt your credit score.
Your utilization ratio, like your payment history, makes up a significant portion of the composition of your credit score.
For example, if you have a $5,000 balance on a credit card with a $10,000 line of credit, your utilization ratio would be 50%. The higher your utilization ratio, the more of a negative impact it has on your score. As a best practice, you want to try and keep your utilization ratio below 20%.
No New Account Applications
While you are working to pay down those credit card balances, don’t be tempted to open any new credit accounts just before, or even during, the home loan application process.
Too many inquiries on your credit report can not only hurt your score but also be a negative factor in the eyes of lenders.
Potential lenders may see an excessive number of inquiries as a sign that you are desperate for credit and potentially a higher risk mortgage borrower.
Become an Authorized User
Applying for a mortgage is a stressful part of the house-hunting process. Planning ahead and taking steps to clean up your credit profile before you apply for a loan can save you time, money, and stress, making the house-hunting process just a little bit easier.
If you have a trusted family member who has credit accounts with a well-established credit history, your credit profile may receive a boost by being added as an authorized user on their account.
It is important to remember that any negative activity from late payments they incur will affect your credit and vice versa. You’ll want to have a heart to heart with your loved one regarding expectations before being added to their account.
Request a Rapid Rescore
If you have already begun working with a mortgage lender and positive changes have been made to your credit report as a result of adjustments for disputes with the credit bureaus, your lender may be able to help.
A rapid rescore allows the credit bureaus to generate a new credit score based on the new information in your credit profile. This usually occurs within five business days rather than the weeks it could take based on the credit bureaus’ regular practices. This can significantly speed up the mortgage application process, moving you one step closer to homeownership. Working as a self-employed business owner or an independent contractor can have enormous advantages. The ability to go your own way and earn money based on your experience and talents is certainly appealing, as is the chance to work from just about anywhere.
But for the self-employed, activities the rest of the world takes for granted can present some extra challenges. From filing taxes to making a budget, many parts of financial life are far more complicated for the self-employed.
Chief among these challenges is proving your income, something nine-to-five workers rarely give a second thought. For the traditionally employed, verifying income can be as simple as giving the bank a couple of pay stubs, but for the self-employed, the process is a little more involved.
Why You Might Need to Verify Your Income
There are several times when a self-employed individual or contract worker would need to verify their income. Circumstances can vary, but here are some examples of when income verification might be required.
• Applying for health insurance through the official Federal government marketplace or various state exchanges – Health insurance is a major consideration for the self-employed, but programs like the Affordable Care Act make it easier. Government subsidies can make buying health insurance more affordable, but qualification is based on income.
• Qualifying for small business loans and government grants – There are loans and government grants available for qualified small business owners, but applying for them typically involves verifying and disclosing your income.
• Applying for government benefits – Many government benefits, from health care to housing subsidies, are income-based. If you plan to apply for any of these benefits, you will need a way to verify your self-employment income.
• Buying a home – Getting approved for a mortgage can be a real challenge for the self-employed, especially if your business is relatively new or your receipts vary from month to month. If you are applying for a home loan, you can expect a vigorous income verification process.
• Getting a car loan – Rideshare drivers who need to upgrade their vehicles may encounter problems during the loan application process, starting with difficulties verifying their income. Everyday drivers may face these issues, so keeping careful records is important.
• Setting up a business bank account – Having a separate bank account for self-employed income and business receipts is important, but the bank may ask about income when you fill out the application.
• Renting an apartment – When you rent an apartment, the landlord will want to know you can pay what you owe. Some landlords are wary of renting to self-employed individuals, so having quality records could be key.
• Making quarterly income tax payments – Advance income tax payments are a way of life for the self-employed, and income verification will make it easy to stay in the good graces of the IRS without paying more than you owe.
Strategies for Verifying Self-Employment Income
Being able to verify income is very important for the self-employed, and there are strategies that can make it easier. If you are self-employed, you need to keep scrupulous records, not only for future income verification but for current taxes and living expenses as well. Here are some strategies you can use to verify your income as a self-employed individual, independent contractor, or small business owner.
• Bank statements – Hopefully, you already have a separate bank account for your self-employment income and business receipts. If not, now is the time to set one up. Once that account is in place, you may be able to use it to document the income you are claiming.
• Profit and loss statements – If you use a small business accounting software package like QuickBooks, you can use the profit and loss statements it generates to verify your income. You should keep these profit and loss statements anyway, so using them for income verification gives you an additional benefit.
• Income tax returns – If you are self-employed or work as an independent contractor, your income tax return probably includes a Schedule C. Depending on what benefits or loans you are applying for, you may be able to use that information to verify your business income.
• Online payment records – Many independent contractors and small business owners are paid electronically through services like PayPal and app-specific platforms. If you get paid this way, it is important to keep records of those payments. Taking screenshots, downloading statements, and taking other verification steps will make documenting your income easier.
A growing number of men and women are ditching the traditional world of work for the flexibility and freedom of self-employment. If you are one of those individuals, you need a strategy for documenting and verifying your income.
Knowing how much you are earning and where that money is going will make budgeting easier, so you can save more money and build a cash cushion against future slowdowns. In addition to those important benefits, having the ability to verify your income can help you qualify for health insurance subsidies, car loans, and even a home mortgage.