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The decision to build a new home typically doesn’t happen overnight. Neither will the process of obtaining a construction loan – it will start long before the actual loan closing. While picking a house plan, reviewing home elevations, and selecting colors are the exciting part of building a new home, one of the first things you should do is understand your current credit standing. Establishing your current financial picture early on is a critical first step when it comes to building a new custom home.
A good credit score is the key to success when financing the construction of your new home. However, while good credit opens the door to building your custom dream home, poor credit can close it. The Dodd-Frank Wall Street Reform and Consumer Protection Act devotes more than 200 pages to a section called the Mortgage Reform and Anti-Predatory Lending Act. New financial reform legislation includes provisions to prevent lenders from offering mortgages that borrowers can’t afford or understand. In 2015 a new provision went into effect that attempts to simplify the forms completed at closing but also adds stipulations that can increase average closing timeframes. The new rules have also upped the scrutiny of mortgage applications and for many, has made qualifying for a loan much more challenging.
Whether your credit is in need of a complete overhaul, a minor clean-up or you’re looking to preserve your great credit score, now is the time to review your credit reports and address any issues. Here are 10 steps to take to strengthen and solidify your credit score to get the best construction loan and home mortgage at the best rate.
- Get your Free Credit Report Today! – If you don’t have a current one, get your credit report now. You need to be aware that issues exist before you can solve them. Depending the number and severity of the issue, they can sometimes take months to correct. You can pay to get a copy of each of your credit bureau reports and your score. You are also entitled to a free one from each of the three credit bureaus once a year under the FACT Act, however you will won’t get a copy of your credit score. Just go to the free Annual Credit Report website.
- Find Any Mistakes and Dispute them Quickly – As many as 42 million Americans have errors on their credit reports, according to a Federal Trade Commission study. An error is an inaccuracy, it could be a completely incorrect credit record or even an incorrect piece of information such as a date, an amount, etc. As soon as you find one, fix it. It’s entirely up to you. Each credit bureau’s website provide guides on how to dispute errors on their specific version of your credit report. It will also provide you timeframes to get a response. The process can take time but the results will be worth it.
- Pay Your Bills on Time – This may sound like a no-brainer, but one missed payment on an otherwise great credit report can be devastating. However, making payments on time, over time, is one of the best ways to keep a credit score moving upward.
- Pay More Than the Minimum – Another great way to increase your credit score is to always make more than the minimum payments on your revolving credit lines every month. The benefits are twofold – not only will you save money on interest but you will also be reducing your outstanding balance more quickly.
- Keep Your Balances Low – One of the key inputs to your credit score is credit usage. The typical rule is to keep your balances under 30% of the card limit. Balances under 10% are even better. Start working today on getting your debts below the 30% mark and enjoy the corresponding credit score increase.
- Don’t Borrow Money to Build Your Score – When you need to jumpstart improving your credit score, one of the worst credit score rumors is that you need to borrow money to build a credit score. Just have a credit card and pay it on time and in full each month. That’s all it takes.
- Don’t Increase Your Number of Credit Cards – Many experts believe that three credit cards is sufficient to maintain a great credit score. Don’t fall into the trap of getting a new credit card and transferring balances to keep your balances below 30%. Pay off the debt on your existing cards, don’t just spread it to a new one. You’ll pay off your overall debt faster (and not incur balance transfer fees and interest) if you just work hard to pay down what’s on the cards you already have.
- Cutting Up Your Credit Cards – While it may sound logical, and even be liberating, to cut up your cards as you pay down your debt, it probably isn’t a good idea. There’s some controversy regarding whether you should close your paid-off accounts. Closing cards also reduces your average length of credit which is used as indicator of a good borrower on a credit report. It’s probably better to play it safe: pay off all your credit cards, but don’t close any of them prior to applying for a construction loan or mortgage.
- Buying a Car or Making a Large Purchase Can Hurt Your Credit Score – It happens more often that you think. Buying a new home means you need new furniture and a new car for the garage. If you can afford then that is great. If you are financing your home then you should get it the day after your final close on your mortgage and you move into your new home. Otherwise that inquiry on your credit, the increase in debt, and reduction in your debt-to-income ratio can kill your dream of building a home soon. Any significant buys can alter your financial picture, and banks don’t like to see sudden changes just before approving a loan.
- Start Planning Now – Checking your credit, reviewing your ratios, and insuring your paperwork and records are in order takes time. Even without any credit issues you want to pay down any debt. Improving your credit score and overall credit picture can increase your chances for approval, lower your interest rate, and possibly lower your down payment requirements.
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