When shopping around for your mortgage loan, a higher credit score will make you eligible for better rates and loan programs. More than that, there are also plenty of common credit mistakes well-intentioned home buyers make that hinder their ability to secure a quality mortgage. Here are five mistakes you’ll want to know about if buying a home is on your upcoming financial agenda.
1. Not Reviewing Your Credit Reports Before Home Shopping
If your credit report contains errors, you have the legal right to dispute the incorrect information. However, this is a process that can take anywhere from several days to several months to resolve completely.
As soon as you seriously consider buying a home, obtain a free annual credit report. Review them for accuracy, and take note of credit balances. The lower they are in relation to your available credit lines (ideally, less than 10 percent), the better your credit scores are going to be.
Give yourself at least three to six months to lower your credit card balances. You will ideally pay them by the statement close date, so that the smaller balances are reflected on your credit report when you’re ready to pursue mortgage pre-qualification.
2. Paying Accounts In Collections
In terms of your credit scores, a collection account on your credit report has likely inflicted its share of damage. Though it stands to reason that you would want to resolve these derogatory events before applying for a mortgage, paying them off could actually do more harm than good; once collections accounts are a few years old, the impact to your FICO score isn’t as significant (because again, the damage has already been done).
When you pay old collections accounts years after the fact, you could potentially make it appear like a recent event on your credit history. In turn, it could lower your credit scores. While this makes no sense at all, it’s certainly true. New activity on an otherwise old, inactive derogatory item can lead to a lower score.
3. Closing Credit Card Accounts
Avoid opening new lines of credit when you know you’ll soon apply for a home mortgage, and keep the credit accounts you do have open and in good standing – even if you’ve long cut up the physical card, and paid the balance to $0. If you close a credit card account you’ll lose the value of the unused credit limit, which can lead to a spike in your debt-to-limit ratio and lower your scores.
4. Making Any Kind Of Major Purchase – Even In Cash
Hold off on making any new purchases (even in cash) until after you close on your home. Not only can incurring recent debt temporarily lower your credit score, staying as “liquid” as possible will benefit your debt to income ratio when lenders review how much home you can afford to buy.
5. Taking Months To Find A Lender
Though your credit score may take a slight hit when you authorize a potential home lender to pull your credit for pre-qualification, you won’t be penalized for shopping for the best loan options. That said, there is a time sensitivity to consider. Limit your search for a home lender to no more than 30 days to ensure you don’t accidentally lower your credit score in the process.