Your credit profile can have a significant impact on your ability to qualify for a mortgage, as well as the interest rate and loan options available to you. The good news is that there are practical steps you can take to protect and potentially improve your credit before buying a home.
Just as important, there are certain credit moves you should avoid while preparing for a mortgage. A change that seems harmless can sometimes affect your credit score, monthly obligations or mortgage qualification.
DO: Pay Every Account on Time
Payment history is one of the most important factors affecting your credit scores. Make every effort to pay credit cards, auto loans, student loans and other reported debts on time.
Automatic payments and account alerts can be helpful, particularly for accounts you do not use frequently. Even one missed payment can potentially have a significant effect on your credit profile.
DO: Keep Credit Card Balances Low
The amount of revolving credit you are using compared with your available credit can affect your credit scores. In general, lower credit card utilization is better for your scores than carrying balances close to the credit limits.
There is no single utilization percentage that guarantees a particular credit score. If you are preparing to apply for a mortgage, paying down revolving balances may potentially improve your credit profile while also reducing monthly debt obligations.
DON’T: Open New Credit Without Talking to Your Loan Officer
If you are planning to buy a home, avoid opening new credit accounts unless you have discussed the decision with your loan officer first.
A new auto loan, credit card, personal loan or other debt can affect both your credit and your debt-to-income ratio. This is especially important after you have been pre-approved and while you are under contract to purchase a home.
DON’T: Finance a Car, Furniture or Appliances Before Closing
Once you are preparing for a home purchase, it is generally a good idea to postpone major financed purchases until after the mortgage has closed.
That new vehicle or furniture account may create a monthly payment that has to be included when qualifying for the mortgage. Even if you can comfortably afford the payment, it could change the loan amount or program for which you qualify.
DON’T: Close Credit Cards Just to Improve Your Credit
Closing a credit card does not automatically improve your credit score. In some cases, closing an account can reduce your available revolving credit and increase your overall utilization percentage.
If you are considering closing an account while preparing for a mortgage, it is worth discussing the potential impact before making the change.
DON’T: Pay Off Collections or Other Derogatory Accounts Without a Plan
It may seem logical to immediately pay every collection or derogatory account appearing on your credit report, but the best approach can depend on the account and the mortgage program being used.
Before paying, settling or disputing an old collection account, talk with your loan officer. We can review how the account is being reported and whether taking action is necessary or beneficial for mortgage qualification.
DON’T: Co-Sign for Someone Else’s Loan
Co-signing for a family member or friend can create a debt obligation that may affect your mortgage qualification. Even when someone else intends to make the payments, the debt may still need to be considered during underwriting.
If you expect to purchase or refinance a home soon, speak with your loan officer before agreeing to co-sign for another borrower.
DO: Check Your Credit Early
Do not wait until you have found a house to learn what is on your credit report. Reviewing your credit early gives you time to identify inaccurate information, understand your current profile and address issues before they become an obstacle to financing.
Consumers can obtain their credit reports through AnnualCreditReport.com. Keep in mind that consumer credit-monitoring scores may not necessarily be the same scoring models used for mortgage lending.
DO: Be Careful With Credit Disputes During the Mortgage Process
If you find information on your credit report that you believe is inaccurate, it may be appropriate to dispute it. However, active disputes can sometimes create additional steps during mortgage underwriting.
If you are already applying for a mortgage, discuss a potential credit dispute with your loan officer before initiating one so you understand how it could affect the loan process.
Your Credit Can Change Before Closing
Mortgage qualification is not necessarily based on a credit report that is reviewed only once. Lenders may verify credit-related information again before closing, and newly opened accounts or additional debt can create problems late in the process.
From pre-approval through closing, the safest approach is to avoid significant changes to your credit or finances without first discussing them with your loan officer.
Have Questions About Your Credit Before Buying a Home?
You do not need perfect credit to start a mortgage conversation. If you are considering buying a home, reviewing your credit early can help identify which loan options may be available now and whether there are steps worth taking before you apply.
Questions?
Call or text me at 240-670-5090 or email me at CJMT@mainstreethl.com.
