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Your credit report and scores are an extremely important part of qualifying for a mortgage to purchase a home. A few points in either direction or a derogatory credit item or two can mean a much better deal or the difference between qualifying and not qualifying. So it's important that you take care of your credit before you apply for the loan and during process of completing the loan.
If you're in the market for a new home loan, the following are some important "dos" and "don'ts" about how to manage your credit before and during the loan process to help ensure you get the best mortgage deal possible.
1) Don't let anybody run your credit while your loan is in process. It's not unusual for lenders to do a "light" hit or pull a new credit report (if the old one has expired) near the end of the loan process. If your scores have fallen because of additional inquiries or newly opened accounts, it could change the terms of the loan or result in loan denial.
2) Don't rack up more credit card debt or take on new debts. As I already mentioned, it's not unusual for lenders to check for new debts at the end of the loan process. If any come up, the lender will insist on including the payments in your debt-to-income ratio. Best case, this will be simply a hassle that delays the closing of your loan. Worst case, it could result in loan denial if your debt-to-income ratio increases beyond what is allowed under the guidelines. If you've racked up a lot more credit card debt, the lender may require an updated credit report. If your scores have fallen, if could change the rate and fees on the loan or result in it being denied altogether.
3) Shy away from cosigning. If the lender finds out about a new cosigned debt, they'll include it in your debt-to-income ratio even if you're not going to be making the payments. If your debt ratio was tight to begin with, it could kill your loan.
4) Do continue to make all payments on time, including mortgages. Lenders often will check for late payments near the end of the loan process, and if any pop up, it could kill your loan.
5) Do unlock any credit report freezes before beginning the loan process. Credit freezes can take some time to clear, so be sure to remove them from all three major credit bureaus (TransUnion, Equifax, and Experian) before you apply to avoid delays that can result in lock extension fees down the road.
6) Do clear up derogatory credit items before beginning the loan process. Derogatory items such as collections, judgments, and charge-offs can negatively impact your scores and prevent you from getting the best deal possible or getting a loan at all. Before you begin shopping for a loan, get a copy of your report from all three bureaus (TransUnion, Equifax, and Experian) and clear up any derogatory items reported. You can get a free copy of your credit report once each year per federal law from AnnualCreditReport.com.
7) Do correct any HELOCs being reported as revolving accounts. If your mortgage lender is reporting a HELOC as a revolving account instead of a mortgage and the balance is over 50% of the limit, it could damage your credit scores. Make sure your lender is reporting your HELOC as a mortgage, not a revolving account like a credit card.
8) Keep revolving accounts balances below 30% of the limit. If you have high balances on your credit cards, the reporting agencies may view you as "maxed out" and seriously hit your scores. Be sure to keep revolving account balances below 30% of the limits even if you pay your bills in full every month.
Your credit report is basically a report card for how you handle your finances, so lenders put a lot of weight on it when qualifying you for a purchase home loan. Manage your credit well and it will be much easier for you to get a great mortgage deal.
If you're in the market for a new home loan, the following are some important "dos" and "don'ts" about how to manage your credit before and during the loan process to help ensure you get the best mortgage deal possible.
1) Don't let anybody run your credit while your loan is in process. It's not unusual for lenders to do a "light" hit or pull a new credit report (if the old one has expired) near the end of the loan process. If your scores have fallen because of additional inquiries or newly opened accounts, it could change the terms of the loan or result in loan denial.
2) Don't rack up more credit card debt or take on new debts. As I already mentioned, it's not unusual for lenders to check for new debts at the end of the loan process. If any come up, the lender will insist on including the payments in your debt-to-income ratio. Best case, this will be simply a hassle that delays the closing of your loan. Worst case, it could result in loan denial if your debt-to-income ratio increases beyond what is allowed under the guidelines. If you've racked up a lot more credit card debt, the lender may require an updated credit report. If your scores have fallen, if could change the rate and fees on the loan or result in it being denied altogether.
3) Shy away from cosigning. If the lender finds out about a new cosigned debt, they'll include it in your debt-to-income ratio even if you're not going to be making the payments. If your debt ratio was tight to begin with, it could kill your loan.
4) Do continue to make all payments on time, including mortgages. Lenders often will check for late payments near the end of the loan process, and if any pop up, it could kill your loan.
5) Do unlock any credit report freezes before beginning the loan process. Credit freezes can take some time to clear, so be sure to remove them from all three major credit bureaus (TransUnion, Equifax, and Experian) before you apply to avoid delays that can result in lock extension fees down the road.
6) Do clear up derogatory credit items before beginning the loan process. Derogatory items such as collections, judgments, and charge-offs can negatively impact your scores and prevent you from getting the best deal possible or getting a loan at all. Before you begin shopping for a loan, get a copy of your report from all three bureaus (TransUnion, Equifax, and Experian) and clear up any derogatory items reported. You can get a free copy of your credit report once each year per federal law from AnnualCreditReport.com.
7) Do correct any HELOCs being reported as revolving accounts. If your mortgage lender is reporting a HELOC as a revolving account instead of a mortgage and the balance is over 50% of the limit, it could damage your credit scores. Make sure your lender is reporting your HELOC as a mortgage, not a revolving account like a credit card.
8) Keep revolving accounts balances below 30% of the limit. If you have high balances on your credit cards, the reporting agencies may view you as "maxed out" and seriously hit your scores. Be sure to keep revolving account balances below 30% of the limits even if you pay your bills in full every month.
Your credit report is basically a report card for how you handle your finances, so lenders put a lot of weight on it when qualifying you for a purchase home loan. Manage your credit well and it will be much easier for you to get a great mortgage deal.
About the Author:
Wanting to purchase a home, but have a BK or foreclosure in the past? Find out when you can get a mortgage after a foreclosure and bankruptcy.
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