How can I clean up my credit before refinancing?

Posted by  on Mar 20, 2011

Mortgage rates near record lows may have you thinking about refinancing. But qualifying for the best mortgage rates requires excellent credit. There are several things that can be done to improve your credit score before applying for a home refinance.

Avoid credit repair scams

First, you don't need to hire someone else to repair your credit. There are many advertisements from companies making all kinds of claims about how they can improve your credit score. Unless you are working with a reputable debt counselor, it's best to steer clear of debt relief agencies that may charge high fees to help you, or even leave you worse off. Be proactive about fixing your own credit problems and use the following steps:

  • Get a copy of your credit report and review it carefully. Look for inaccurate information so that you can have it corrected. Also look for information that is out of date. For example, if you filed for bankruptcy 20 years ago, that information should not be on your credit report since bankruptcies should only appear for up to 10 years.
  • Call the credit reporting agency that issued the report to discuss any errors. Follow up with a letter that details the same information and asks to have it corrected. If necessary, follow up with the creditor who actually reported the inaccurate information to the credit bureau. Keep careful records of all phones calls and correspondence. You can see a sample dispute letter on the Federal Trade Commission Website.
  • Start tackling your debt. A high debt-to-income ratio can work against you when trying to qualify for the best refinance rates. Total up all outstanding balances for credit cards, auto loans, and other debt so you know exactly where you stand. Choose one account that will get extra money applied to the principal each month. Once that debt is paid, roll over the amount of the monthly payment into what you send in each month on another debt. Continue doing this until all debts are paid.
  • Pay bills on time. Late payments not only result in late fees, but can affect your interest rate. Late payments also are noted on your credit report, signaling to mortgage lenders that you may have trouble repaying a mortgage loan after a refinance. Work on reducing monthly expenses to have more income available to pay bills on time.
  • Try sticking to a budget. Knowing exactly how much income you have coming in makes it easier to stick to a financial plan, pay bills, and dump debt.

Get approved for refinancing

Improving your overall financial situation makes you a more attractive candidate for refinancing. Mortgage lenders are in the business of loaning money to make money. So you won't get approved for a refinance just because are nice person and promise to repay a loan. Expect to have decent credit, have a regular income, and be able to provide all the necessary documentation to get approved for a mortgage refinance.


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