Your credit scores and profile are one of the biggest factors in qualifying for a home purchase mortgage. A few points in either direction or a few bad credit items can make the difference between a good mortgage deal or a not-so-good one, or the difference between qualifying or getting turned down. It's extremely important to take care of your credit before you apply and throughout the mortgage qualifying process.
If you're planning to apply for a home purchase loan in the near future, the following are some important "dos" and "don'ts" regarding your credit to help you get the best mortgage deal you can.
1) Don't let anyone run a credit report while your loan is in process. Lenders often will do a "light" inquiry or run a new credit report (if the old one has expired) late in the loan process, and if your scores have fallen because of new inquiries, it could change the loan terms or result in getting turned down.
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 remove credit freezes before applying for the loan. It can take a few days for credit freezes to clear, so it's important to take care of it in advance of applying for the loan so it doesn't delay the loan process and result in lock extension fees down the road. Make sure you remove freezes from all three major credit reporting agencies: Experian, Equifax, and TransUnion.
6) Do clear up collections, judgments, and charge-offs on your credit. Derogatory items such as these can have a big impact on your scores and make it tough to get a good deal or get a loan at all. Before you apply for a mortgage, get a copy of your credit report from all three major reporting agencies (TransUnion, Equifax, and Experian) and clear up any derogatory items reported. You can get a free copy of your report once each year per federal law from AnnualCreditReport.com.
7) Do correct home equity lines of credit (HELOC) being reported as revolving accounts. If your lender is reporting your HELOC as a revolving account instead of a mortgage and you have a large balance on it, it could hurt your credit scores. Make sure your lender is reporting your HELOC as a mortgage instead of 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 planning to apply for a home purchase loan in the near future, the following are some important "dos" and "don'ts" regarding your credit to help you get the best mortgage deal you can.
1) Don't let anyone run a credit report while your loan is in process. Lenders often will do a "light" inquiry or run a new credit report (if the old one has expired) late in the loan process, and if your scores have fallen because of new inquiries, it could change the loan terms or result in getting turned down.
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 remove credit freezes before applying for the loan. It can take a few days for credit freezes to clear, so it's important to take care of it in advance of applying for the loan so it doesn't delay the loan process and result in lock extension fees down the road. Make sure you remove freezes from all three major credit reporting agencies: Experian, Equifax, and TransUnion.
6) Do clear up collections, judgments, and charge-offs on your credit. Derogatory items such as these can have a big impact on your scores and make it tough to get a good deal or get a loan at all. Before you apply for a mortgage, get a copy of your credit report from all three major reporting agencies (TransUnion, Equifax, and Experian) and clear up any derogatory items reported. You can get a free copy of your report once each year per federal law from AnnualCreditReport.com.
7) Do correct home equity lines of credit (HELOC) being reported as revolving accounts. If your lender is reporting your HELOC as a revolving account instead of a mortgage and you have a large balance on it, it could hurt your credit scores. Make sure your lender is reporting your HELOC as a mortgage instead of 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 bankruptcy or foreclosure in the past? Find out when you can get a home loan after a foreclosure and bankruptcy.
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