guide to acquiring a mortgage
Buying a home is an exciting journey, but it requires careful planning and preparation, especially when it comes to your credit score. Here are some strategies to help you improve your credit score before applying for a mortgage.
Timely Payments
Payment history accounts for 35% of your credit score, making it crucial to make all your bills on time. Consistently making at least minimum payments by the due date can significantly improve your score. Late payments, collections, liens, foreclosures, or bankruptcies can severely damage your score for years.
Lowering Credit Utilization
Keeping your credit utilization ratio below 30%, ideally closer to 10%, is essential. This means using less than one-third of your available credit limits. Paying down existing balances quickly and requesting credit limit increases (without triggering a hard credit inquiry) will reduce utilization, boosting your score.
Checking and Disputing Errors
Errors or fraudulent accounts on your credit report can lower your score by many points. Obtain your free credit reports from the three bureaus, review them thoroughly, and dispute any inaccuracies directly with the bureaus and creditors.
Maintaining Existing Credit Accounts
Length of credit history matters, so avoid closing older credit cards even if you’re not using them much. This helps retain a longer average account age and account diversity.
Avoiding New Credit Accounts
Each hard inquiry may lower your score slightly, and too many new accounts in a short time can look risky to lenders. Be cautious about opening many new credit accounts at once.
Financial Conservatism
New debt can increase your credit utilization and risk profile, hurting your score. Be financially conservative while preparing to apply for a mortgage.
Following these strategies can lead to noticeable credit score improvements within 3 to 6 months, increasing your chances of qualifying for a mortgage with favourable rates. Starting early and monitoring your credit regularly is key.
Comparing Offers and Preparing for Closing Costs
Comparing offers from at least three lenders could save you a significant amount of money. Closing costs are the fees you'll pay to finalize the mortgage and typically total between 2 and 5 percent of the loan's principal.
Preparing for getting a mortgage also involves knowing what you can realistically afford, having a good credit score, and saving for a down payment. Saving for a down payment is crucial, preferably 20 percent to reduce your mortgage loan, qualify for a better interest rate, and avoid having to pay private mortgage insurance.
The Mortgage Application Process
The mortgage application process requires providing proof of identification, income, assets, and may require gift letters if a friend or relative gives money for a down payment. The closing process takes an average of 41 days as of June 2025.
During the underwriting process, information provided during the application is confirmed, an appraisal of the property is conducted, and a title search is done to ensure the property can be transferred. A mortgage broker can help you navigate your loan options and possibly get more favourable terms than you'd be able to secure on your own.
Getting Preapproved
Getting preapproved for a mortgage is important because many sellers won't entertain offers from someone who hasn't already secured a preapproval. Preapproval involves much more documentation and a hard credit check compared to prequalification.
Building Up Cash Reserves
It's equally important to build up your cash reserves, with many experts recommending having the equivalent of six months' worth of mortgage payments in a savings account.
Reading lender reviews can help you learn about the pros and cons of various lenders, helping you narrow the field. When finding a mortgage lender, it is recommended to speak with friends, family members, and your agent for referrals, look on rating sites, perform internet research, and read consumer reviews on lenders.
[1] MyFico.com, Understanding Your Credit Score
[3] Experian.com, Improving Your Credit Score
[5] CreditKarma.com, How to Improve Your Credit Score
- To improve your chances of securing a mortgage with favorable rates, focus on strategies such as maintaining timely payments, lowering credit utilization, checking and disputing errors on credit reports, and maintaining existing credit accounts.
- In the realm of personal finance, it's essential to be financially conservative and avoid taking on new credit, as well as saving for a down payment, ideally 20 percent, to improve your mortgage rates.
