When people call me to apply for a mortgage in Virginia, DC or Maryland, I am amazed how little people know about credit. Since credit determines how much interest will be charged for borrowing the money and how easy it will be to obtain the loan, you would think people would make it their business to know how their credit stands at all times or if they can do anything in order to improve the score. I rarely have a person come in to apply for a mortgage loan that has prepped their credit. Since credit is just a snapshot in time of the standing on all of your accounts as reported by the creditor, tweaking your credit beforehand can be important and can save you real money by taking a couple of measures at least a month before applying for that home loan.

1. Get your annual credit report - Go to AnnualCreditReport.com and pull up your free annual consumer credit report from all three credit bureaus Equifax, Experian and Transunion. This will give you all the information being reported by all of your creditors. Analyze this report carefully and start submitting disputes for incorrect, erroneous or any information that is negative. They have automated the system where you can see the report and file your dispute electronically. As a rule of thumb, after you file for disputes also write a letter disputing the same item and wait for a month to mail it out. This will help if the disputes you filed come back, and the item in dispute reports back information that leads the credit bureaus to determine that this is your debt and all information is correct. When they get that 2nd letter they will mail a request for the same information, and the creditor might not respond within the allotted 30-day window. This means that by law the credit bureau must delete this record.
2. 35% is the magic number! - The credit bureaus (Equifax, Experian and Transunion) put “weight” on how much you’ve borrowed versus what your credit limit is. If you have a $1,000 credit card and your balance is $850, this hurts your credit even though you are below the limit (if you go over the limit, the bureaus’ penalty is severe so be warned). The optimal balance in this situation would be $350. If this is the case, you would “prep” your credit by paying down your balance to the optimal amount before you apply. The tricky part about this is the timing. If you pay it down in September, it might not be reported to the bureaus until October. A good rule of thumb is to pay it down and wait for your next statement to reflect the new balance. The creditor should have reported to the bureaus by then. If you are close or over the limit and you can’t afford to pay it down to 35%, you should at least shoot to get the card back under the limit and get it as low as you can.
3. Don’t do anything! - Yes, don’t pay back that collection. This is a real simple step, right? When prepping your credit, you probably think that paying off that old collection will help raise your score.  Well, this is not always true. Let’s say you had a collection filed against you 3 years ago and in year number 2, the company or collection agency decided to stop updating the collection (which happens frequently). So now you have a collection that states, “Last Reported 1/2006″ on your credit profile. If you pay this off, the company or collection agency will update (at least they are supposed too!) the account with the bureaus and this will cause this negative trade line to go from last updated 2006 to last updated 10/2007. Even though it shows a zero balance now, this will open this wound up again and cause more harm than good. You would typically make sure that it is an inactive collection (at least 7+ months with no activity). Once you have verified this, run your report as normal but pay off the collection after your credit has been pulled. Now, if the collection was just reported in the last 2-6 months, chances are good that they are still reporting it, so paying it off immediately would be wise. Consult your loan officer for the best advice pertaining to your situation.
4. Don’t apply for new loans - Hold off on that great credit card offer. Want to buy a car? You shouldn’t concentrate on making any additional large purchases until you have applied for a mortgage and know the outcome. Preferable outcome would be that you’ve gone to settlement on your new home. If you have yet to put a contract on a property or close on the purchase, discuss any matter that can possibly affect your credit with your loan officer. Tell them what you want to do.

If you follow these simple steps your credit rating will be positively impacted. The major thing to keep in mind here is that credit is a snap shot into your life- so dress up for the camera =). Although I know that paying down a credit card is easier said than done, this should be the goal on your mind at all times if you have any kind of credit outstanding. Let’s put it this way:  If you have a credit card that has a limit of $1,000 and you are over the limit with a balance of $1,100. Paying it down to a 35% balance to $350 would cost you $750. If this raises your credit rating, and in turn gives you a better mortgage rate by at least .25% on a $300K purchase, you would save about $750 a year (or $63 a month) in interest on the mortgage. Pay on the mortgage for at least 2 years and you just saved serious money!

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