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 take on new debts or add significantly to your credit card balances. Again, lenders will check near the end of the loan process for new debts in your credit file. If any pop up, they'll insist on adding the payments into your debt-to-income ratio. Best case, this will be just a last minute hassle. Worst case, it could cost you the loan if the new payment increases your debt-to-income ratio beyond what is allowed under the lending guidelines. If enough new debt shows up, the lender may insist on running a new credit report, and if your scores have fallen, it could change the terms of the loan or result in loan denial.
3) Don't cosign. If the lender catches wind of a new cosigned account, the payment will be included in your debt ratio. If your debt ratio was already very close to the maximum allowed, this new payment could kill your loan.
4) Do continue making all your payments on time (home loan payments included). Lenders typically will check for late payments near the completion of the loan, and if any show up, it could result in loan denial.
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) Do keep your credit utilization low for revolving accounts. If your credit card balances are near the limits, it can do a lot of damage to your credit scores because it makes you look "maxed out" to the reporting agencies. Always keep your balances below 30% of the limits, even if you pay your cards in full every month.
Your credit file is super important to mortgage lenders because it basically serves as a report card for how you manage your money. If you manage your credit well, you'll be that much better equipped 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 take on new debts or add significantly to your credit card balances. Again, lenders will check near the end of the loan process for new debts in your credit file. If any pop up, they'll insist on adding the payments into your debt-to-income ratio. Best case, this will be just a last minute hassle. Worst case, it could cost you the loan if the new payment increases your debt-to-income ratio beyond what is allowed under the lending guidelines. If enough new debt shows up, the lender may insist on running a new credit report, and if your scores have fallen, it could change the terms of the loan or result in loan denial.
3) Don't cosign. If the lender catches wind of a new cosigned account, the payment will be included in your debt ratio. If your debt ratio was already very close to the maximum allowed, this new payment could kill your loan.
4) Do continue making all your payments on time (home loan payments included). Lenders typically will check for late payments near the completion of the loan, and if any show up, it could result in loan denial.
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) Do keep your credit utilization low for revolving accounts. If your credit card balances are near the limits, it can do a lot of damage to your credit scores because it makes you look "maxed out" to the reporting agencies. Always keep your balances below 30% of the limits, even if you pay your cards in full every month.
Your credit file is super important to mortgage lenders because it basically serves as a report card for how you manage your money. If you manage your credit well, you'll be that much better equipped to get a great mortgage deal.
About the Author:
Wanting to buy 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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