Buying a home is a huge step to take for many people, and involves a lot of planning and preparation. Aside from looking for the perfect location and house, potential homeowners these days also need to consider their credit data — one of the things lenders usually look into before granting mortgage loans. Based on a report by U.S. News titled, “Top 5 Predictions for the Housing Market in 2013,” the U.S. Customer Financial Protection Bureau will be announcing new mortgage rules in 2013, specifically for defining which mortgages can be considered to be beyond a borrower’s capacity to pay back his loan. This would imply legal and financial repercussions for the lender who granted that loan.
This further implies the importance of preparing one’s credit for a mortgage loan. Here are some things you might consider doing:
Evaluate your credit score
Interested homeowners looking to get a mortgage loan must have an acceptable credit score. Most people aim to have a credit score of 850, though the reality is many have scores much lower than that. Take a look at your credit report and find out what your score is.
“But what if my credit score isn’t good enough?” you may ask. “What should I do then?”
One of the things you can do is to get a credit card if you don’t have one. Ironically, using a credit card or two will help build your scores. However, if you are planning to apply for a mortgage loan with bad credit, it is recommended that you pay your credit card bills immediately so that you can go through the pre-qualification process.
Liz Weston, award-winning columnist and author of The 10 Commandments of Money: Survive and Thrive in the New Economy, says if you are not eligible to apply for a regular credit card, you may want to consider a secured credit card. In this case, the issuing bank gives you a credit line equivalent to the deposit you make. Keep in mind that your card should report to all three credit bureaus.
Once you do have a card, Weston recommends limiting one’s charges to 30% or less of a card’s limit. Do not maintain big balances, as these can decrease your credit scores, even if you pay your bills in full every month. This is because credit bureaus receive reports of the balances indicated on your last statements.
Put off credit usage
If you’re applying for a mortgage loan and have already paid off your credit cards in full, do not use them for at least 45 days before you apply. This way, you can more or less be sure that the balances on your credit reports will be $0. Remember, accounts on credit reports are sometimes updated only after a full billing cycle.
After you have applied for the loan and while the loan is being underwritten, ensure that your credit reports do not go through any substantial changes.
Report inaccurate information
Sometimes, your application can be denied because of inaccurate information that can hurt your credit score. If you think that there is any misinformation with regard to your credit, discuss it with the credit bureau, and provide proof of any mistake if you have it. This will help ensure that the mistake is removed from your report.
Liz Weston lists the following errors as being worthy of reporting to the credit bureau:
- Late payments, charge-offs, collections or other negative items that aren’t yours.
- Accounts registered as “settled,” “paid derogatory,” “paid charged-off” or anything other than “current” or “paid as agreed” if you were able to pay promptly in full.
- Credit limits reported as lower than they actually are.
- Accounts that are still listed as unpaid that were included in a bankruptcy.
- Negative items older than seven years that should have automatically fallen off your reports.
Wait until your loan’s closing date
Once your loan has been approved, it doesn’t necessarily mean that you already have the freedom to apply for new credit. This is because your credit scores and reports may be pulled again before your closing date. This is done to ensure that your credit and debt have not been affected in any way that may cause the lender to change their minds.
Therefore, a good suggestion is applying for new credit only after one’s loan has closed. You should also wait until the loan has closed before buying expensive items and charging them to your credit card.
This is because incurring new debts can hurt your credit scores and have a negative effect on your debt-to-income ratios. Remember, lenders will doubt your ability to pay your mortgage if you have a high level of debt relative to your income. As much as possible, make sure that your monthly debt payments do not exceed 12% of your income. Take note, too, that once your mortgage loan is approved, your debt-to-income ratio will be higher, but should not exceed 43% of your income.
Applying for a mortgage loan even with bad credit is still possible as long as you know what precautions and measures to take. How about you? Have you ever tried preparing your credit for a mortgage loan? What worked for you? What didn’t? Feel free to share your experiences and tips in the comments section. Also, if you have found this post useful, do share it with your friends by clicking on any of the buttons below (if applicable).