If you’re ramping up to approach a lender about a mortgage on a new home, this is a good time to get your financial “house” in order.
Getting your finances and credit history shipshape right now could well mean the difference between a smooth-as-silk approval with excellent lending terms, or downright rejection because you appear to be too high of a credit risk.
The good news is that the odds of approval are vastly in your favor. A recent report showed 88.2 percent of the mortgages requested in Texas, and in the U.S. as a whole, resulted in approval.
“More mortgage loans are being approved than during any period in recent history,” states an article on industry news site Themortgagereports.com. “Lenders have armed themselves with better lending models and feel buoyed by the rising U.S. housing market. (They’re) now making new concessions for borrowers with less-than-perfect credit and for those with little or no home equity. If you're worried about getting turned down for a mortgage, it can't hurt you to apply.”
That said, certain aspects of your credit history could significantly hurt your odds of getting a mortgage — or a mortgage with favorable terms. The process isn’t an exact science, and most remedies aren’t quick fixes; remediation may require time, repetition and a significant change in your spending habits. Still, your chances of approval may increase if you follow these suggestions prior to asking for a mortgage loan:
- Evaluate your credit history. Before approaching a lender, get a free copy of your credit report and evaluate whether anything listed could be a hindrance to securing a mortgage.
- Check for mistakes. If you find inaccuracies on your reports, follow each company’s dispute instructions to request corrections. The details you give will be mailed to the provider of that info, which is usually required to verify it within 30 days. After that, you’ll be notified about the results of the investigation.
- Forgo other credit lines. Now is not the time to take out a loan for a new car, say yes to every retail line of credit you’re offered or take advantage of those ready-to-use cards in your junk mail. That’s because charging more expenses right now could skew your debt-to-income ratio; a mortgage lender may question your ability to pay your mortgage if you’re overly obligated to other lenders. Further, credit rating scoring formulas count it against you if you enact multiple credit inquiries not related to your mortgage, auto loan or student loan.
- Keep at least one credit card in play. In general, lenders like to see examples of lines of credit that you’re managing effectively right now. However, yours may advise you to pay off or pay down certain accounts to improve your mortgage outlook.
- Don’t approach maximum credit limits. You’ll look more financially controlled and responsible if your other lines of credit aren’t maxed out. Aim to use credit in moderation and keep your payments regular to avoid red flags with your mortgage lender. In general, you might aim to be using 30 percent of your total revolving credit capacity (i.e., utilization ratio) at any given time.
- Pay off debts in full. Repaying creditors for the entire amount they’re owed is viewed more favorably than paying them a lesser settlement, and that distinction will show up on your credit report. While FICO doesn’t place a number on how that will affect your credit score, it could signal to a lender that it’s similarly unlikely to profit by giving you a loan.
- Pay off newer debts first. Older unpaid debts may be subject to a statute of limitations that makes them disappear from your credit report sooner; for example, bankruptcies and unpaid tax liens remain 10 years, delinquencies seven and credit inquiries two. If expirations are imminent, paying off your more recent debts may be a better strategy for improving the overall appearance of your report.
- Don’t mistake prequalification as a sure thing. Your lender will recheck your credit history before closing on the loan, and is within its rights to refuse it at that point if you’ve made last-minute credit blunders.
- Don’t mess with listed assets without warning. If you’ve already established with your lender the sources of your collateral and down payments, don’t pull a switcheroo and change important qualifying details without giving your lender a heads-up. Such changes could completely change the terms of your loan.
- Don’t change jobs just before applying. Lenders may interpret such a move as unstable, since you haven’t yet proven you can maintain the new job and the steady income.
- Avoid credit repair services. Beware of opportunistic firms billing themselves as “credit counselors” that offer to negotiate debt repayment on your behalf. They can do nothing for you that you can’t do on your own, and can cost hundreds to thousands of dollars. Such companies doubled from 5,000 to some 7,000 after the financial crisis, and the Federal Trade Commission receives some 2,000 complaints about them annually, reports the Washington Post.
- Consider consolidation. Ask your lender if you can secure a lower interest rate for your various credit accounts by consolidating them into one personal, home equity or clear title auto loan. Having just one payment per month may motivate you to get your balance paid off faster, decreasing the likelihood of late payments and delinquencies. But make sure the startup fee and interest rate are reasonable, and that the interest rate is fixed over time.
- Display your positive history. Don’t ask to have old, paid-off debt removed from your credit report; it offers further proof that you take your debt seriously.